There are stocks that just make no sense to own. Sure, they may make for a good trade, but as far as a long-term position in a diversified portfolio, they have no place being there. That’s how I feel about Ford Motor Company (NYSE:F) and Ford stock.
Cars are an intrinsic part of both American society and many countries around the world. Normally, when something like cars is so wrapped around the DNA of the American experience, then it’s a worthy candidate.
Yet if that were true, F stock wouldn’t have gone literally nowhere over the last seven years. Really. Look at the chart. Sure, maybe if you got in at the bottom of the financial crisis at $2 per share and rode it up to $16, you were happy. Otherwise, you’ve been kicking the tires of Ford stock angrily.
The Problems With Ford Stock
So what’s the problem with F and why has Ford stock gone nowhere? Yes, cars are intrinsic to the American experience, but the problem is that there’s also a lot of competition for this retail product. Even though F has a 14% share of the market, and sales did grow about 2% year-over-year, that’s not enough to convert Ford stock into some blockbuster.
It’s a sad observation that F can sell 2.6 million cars and generate close to $150 billion in sales, yet have a bottom line that is so erratic that it is impossible to tell if Ford will make $1.23 billion in net profit as in FY14, or $11.95 billion as it did in FY13. Then it made $7.37 billion in fiscal year 15, and $5.45 billion in the first nine months of 2016.
So is Ford growing or not growing? I have no idea. Q3 profits, on a pre-tax basis, fell almost 60%. This isn’t a company with a flashy car that everyone wants. It has meat-and-potatoes cars and trucks that endure multiple recalls. Ford is plowing capital into both electric and self-driving cars, but even these initiatives won’t give the company any big competitive advantage. Every manufacturer is up to the same things.
Who knows if its $34 billion in cash and short-investments, and $12.3 billion in trailing free cash flow will be enough to hold off the $89 billion in debt. What if we have another financial crisis? Who says the government will step in again and bail out F stock? Maybe buyers are staying away because last time around, the government destroyed the equity to save the company.
Meanwhile, Ford is struggling in North America and Europe and losing market share. F also got into a beef with President Trump because it wanted to move its small car production facility into Mexico, a plan it has now backed away from. That’s a PR nightmare that has been avoided.
In addition, by sticking around in the U.S., if Trump lowers the corporation tax rate, that will mean additional good news for the financial statements.
Bottom Line on F Stock
There is some talk about the Ford dividend, which has a payout ratio of about 33%. I suppose that is of some concern, although without a dividend increase, the free cash flow seems ample to support the dividend of 4.5%.
So I would avoid buying or holding F stock. But you may want to consider trading it: Ford stock has slowly cascaded downward from the $16 to $17 range since last February and is just off its bottom of $11.74.
You probably have above-average odds of making a swing trade profit with F stock now at $12.30. The downside is limited, but I would set a stop-loss at $11, and look to sell above $14.75.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
