Hit three times with the ugly stick, Ford Motor Company (NYSE:F) gives you plenty of reasons to run for cover. First and foremost, F stock has weak technical momentum. Shares are down double-digits for the year, and can’t seem to break above declining resistance. Second, the automotive industry may have hit peak sales, and used-car inventories are rising. Finally, the fundamentals for Ford are sorely lacking.
Despite its repulsiveness, I’m worried that those who try to outright short F stock are going to get burned.
For starters, Ford is underperforming, but it isn’t necessarily hemorrhaging. True, domestic rival General Motors Company (NYSE:GM) is in the black, and Fiat Chrysler Automobiles NV (NYSE:FCAU) is cleaning house with a near 50% year-to-date performance. But things could be a lot worse for the iconic automaker.
I’m not naive enough to ignore the patriotic undertones of the global auto industry. One of the main priorities for Ford management is to beat out the pesky Japanese manufacturers. Although they haven’t exactly succeeded in that endeavor, Japanese automakers aren’t enjoying life either. Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) is flat for the year, whereas Toyota Motor Corp (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC) are down 3.8% and 4.7%, respectively.
From the perspective of Ford stock bears, I also worry about the price tag. From its peak price range in the summer of 2014 until now, F shares have lost roughly 30%. Obviously, that’s not the kind of investment you want to hold. On the flipside, you can make the argument that Ford is quite resilient. Such strength emboldens contrarian investors to pull the trigger.
Mixed Reasons to Be Bullish on F stock
I want to clarify that I’m not recommending a long position in F stock. Recently, I’ve warned against being overly bullish. Chiefly, I loathe jumping onto a company mired in a sluggish — or in this case, peaking — industry. Demographic trends are unfavorable, as evidence indicates that millennials don’t care so much about car ownership. On top of all that, I have to pick the weakest name in the sector? Thanks, but no thanks!
At the same time, I last wrote about Ford stock a few months ago on May 17. Since then, F shares surprisingly took a dramatic leap forward before crashing back down to reality. And here lies the problem: If you were bearish, you’re losing money at this point, albeit a small amount. No matter how fundamentally flawed Ford is, it finds a way to survive.
I’m not entirely sure what the contrarians see in F stock, but here’s what I think. The most obvious indicator is that Ford represents “good value,” at least derived from its price-earnings ratio. However, that’s a byproduct of the share price falling more rapidly than its earnings-per-share. At this juncture in the declining automotive market, the price-to-earnings ratio has little to no bearing on actual value.
The other major incentive is the 5.6% dividend yield. Although generous, InvestorPlace contributor Vince Martin rightfully points out that there’s a reason for it. Martin states that Ford stock is a “value trap,” and I do not disagree. The company had trouble returning shareholder value without the threat of peak auto.
How will it do under the gun?
Ford Stock May Rally, But Don’t Get Fooled!
Still, don’t get too comfortable bashing F stock. While shares have been charting a series of lower highs, it also charted a series of higher lows. Back in January and February of 2016, the bears attempted to drop Ford stock below the key, psychological $10-level.
The attempt failed, and subsequent efforts were undertaken at generally higher price points.
If you had to gamble on Ford stock, the current technical setup favors you. But if you do happen to make a profit, I wouldn’t hold on to F shares longer than necessary.
Ford must come up with a legitimate plan on how they are going to overcome sluggishness in their industry. Furthermore, rising subprime auto defaults means that the American consumer is nowhere near recovered.
Ultimately, what we have in F stock is an underperforming company that might benefit from a sympathy rally. Should Ford shares shoot higher, take it as a bonus run and nothing more. Unfortunately, too many upside challenges exist, which will prevent a meaningful bullish move.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.