Schizophrenia and other emotional breakdowns are fairly commonplace in Hollywood, but lately, we’ve seen similar dynamics affect the markets. One of the primary victims is Ford Motor Company (NYSE:F). InvestorPlace writer Robert Martin is dead on when he wrote that Ford stock is “either one of the best deals on the market right now, or a massive value trap.”
Those that just take a cursory look at the technical charts will find it hard not to think the latter. At a time when markets are broadly buoyed by President Trump’s call for fewer regulations, F stock is the outlier.
Ford stock is down more than 5% against the January opener. Even worse, F stock is down double-digits since the middle of March.
The negativity isn’t just based on speculative trading. From a long-term perspective, such patterns can be overlooked. What can’t be ignored is the company’s own pessimism about its future. For first quarter earnings, Ford stock is now expected to pull in “30 cents to 35 cents in adjusted profits — far worse than the 68 cents the company earned a year ago, and well below analyst expectations for 47 cents.”
Despite these ugly figures, many investors remain hopeful for a turnaround in F stock. A positive mindset is a good thing, but a dose of realism is much more helpful in the markets.
Common Arguments for Ford Stock
I don’t want to imply that those who are bullish on Ford stock are irrational or naive. The biggest recurring theme among the F stock optimists is the dividend yield, which currently stands at well over 5%. That’s noticeably more generous than the offering from rival General Motors Company (NYSE:GM), and miles apart from Toyota Motor Corp (ADR) (NYSE:TM). Fiat Chrysler Automobiles NV (NYSE:FCAU) doesn’t even offer anything.
If dividends were the standard by which all publicly-traded companies were measured, by all means buy Ford stock. However, we have to question why the passive income is so generous. What good is receiving 5% if your capital holdings lose by more than that amount? As such, I’d rather take GM’s 4.4% yield and have the confidence of a comparatively stable platform.
The other bullish argument that pops up for F stock is the value question. At a ratio of ten-times trailing earnings, and seven-times forward earnings, F looks incredibly undervalued. After all, we’re talking about Ford, an American icon. Any dip is a buying opportunity, says conventional wisdom.
The problem is that using the price-earnings ratio as an entry-point gauge is wildly speculative at best. For example, over the last eight years, the PE for Ford stock wildly gyrated from 2.18 at the low to 55.36 at the high. Could traders use this data to their advantage? No, they couldn’t. In fact, they couldn’t advantage the data even with the benefit of hindsight.
F Stock: Undervalued Doesn’t Always Mean “Great Buy”
Here’s why F stock is more value trap than a contrarian trade. In fiscal year 2011, the price-to-earnings ratio for Ford stock dropped to 2.18. The following year, it jumped to 9.18, a 321% increase. Under the commonly mistaken idea that a low P/E is a “good thing,” investors should have jumped on F in 2011, and sold in 2012.
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More recently, Ford stock’s P/E ratio was 7.66 in 2015. Considering that the average P/E ratio was 14.6 between 2009 through 2016, this again was a “great value.”
And once again, you likely would have ended up with the short end of the stick. Ford stock dropped from an average price of $13.55 in 2015 to $12.16 a year later.
I don’t want to discourage people from using earnings data as a research tool. Certainly, it’s useful, especially when comparing against companies in the same industry. But I also want to caution against relying upon it as the sole barometer. In fact, I wouldn’t use it at all unless I had other tools with which to work.
Much of the vulnerability of assessing Ford stock through earnings is that the numbers can be fudged. Not Arthur Andersen fudging, mind you; just that corporate accountants have legal ways of “framing” the overall picture. With F, I think you have to be careful. There’s a reason why it’s underperforming its peers and that should be the focus — not dividends or “implied value.”
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
