Automakers Ford (F) and General Motors (GM) haven’t had that great of a run in the past year or two. Both F stock and GM stock are in the red for the past 12 months, vs. 9% gains for the S&P 500, and since the beginning of 2013, both auto stocks are up less than 20% vs. 50%-plus gains for the S&P in the same period.
But oddly enough, Ford and GM stock continue to post strong numbers, including posting great earnings a few weeks ago. Consider General Motors earnings more than doubled on strong margins driven by pickup truck demand, and Ford saw a 44% jump in profits to trounce forecasts.
Somehow F and GM stock continue to lose speed despite this strength, but it can’t last for long.
That means the current pullback is a great buying opportunity.
Ford and GM Stock Aren’t Perfect, But They Are Bargains
Admittedly, some headlines are distracting investors. For starters, there’s continued success at competitors, such as Volkswagen (VLKAY) that just captured the global sales lead from Toyota (TM). And, of course, there are the continued recall woes that plague GM in the wake of its ignition switch scandal.
Worst of all, a strong U.S. dollar continues to weigh on sales abroad — which, by the way, aren’t looking so hot as Europe continues to struggle amid a Greek debt drama and China’s economy seems clearly to be cooling off.
Click to Enlarge But the profits are strong and the valuations are cheap at both Ford and GM. Just look at the fundamentals and you’ll see that while revenue hasn’t moved much in the last year or two, profitability looks ready to expand nicely for both automakers.
Furthermore, both stocks trade at rock-bottom valuations with GM stock trading for a forward P/E of less than 7 and a price/sales of under 0.4, and F stock trading for a forward P/E of less than 8 and a price/sales of under 0.5!
Top it off with dividend yields north of 4% for both of these stocks, and it’s clear that a lot of negativity has been priced in … and that long-term investors may be getting a steal on these domestic automakers. Those dividends are both sustainable, too, with Ford and GM stock paying roughly just a third of expected 2015 profits back via dividends, leaving plenty of wiggle room for future increases.
Most importantly, investors need to consider the other opportunities out there — or, frankly, the lack thereof. A lot of high-growth stocks including Apple Inc. (AAPL) are starting to show signs of stress, the market is sluggish and there aren’t many good options right now.
As the saying goes, be greedy when others are fearful. There are recall woes and forex problems, yes, but U.S. auto stocks could be a steal here for long-term investors and those interested in the dividend growth potential.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
