Some investors are worried that a global recession will cause the stock market to drop. Specifically, one could argue that automakers’ stocks are foreshadowing such an event.
Ford Motor (NYSE:F) stock, General Motors (NYSE:GM) stock, Fiat Chrysler (NYSE:FCAU) stock and others have had trouble moving higher for years, and many automakers have started to undergo restructuring and close plants.
These companies are looking to cut costs and slim down when they can, rather than when they have to. To that end, many are wondering if we really are on the cusp of a global slowdown. The fact that China’s auto market is slowing for the first time in two decades isn’t encouraging, but conversely GM’s Q4 results came in above its prior guidance, and then GM provided strong guidance for 2019. Now Ford stock is perking up a bit and looking like it wants to go higher.
So what are my thoughts on Ford stock? Here are three reasons why investors may finally want to consider going long Ford stock.
Trading Ford Stock
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I have long preferred GM stock to F stock for a number of reasons. They had similar dividend yields, but GM had better growth and a lower valuation. However, Ford is starting to play catch-up, both in terms of its fundamentals and its charts.
On the charts, F stock has made a series of higher lows outlined by its uptrend support (depicted by the blue line in the chart above) that’s running into overhead resistance (depicted by the black line). A break of F stock below its uptrend support would be discouraging, but it would not be the end of the world. Ford stock is still slightly above its 21-day and 50-day moving averages. If Ford stock price falls below these marks, the shares will certainly need to reset before they’re in an attractive pattern again.
For now, watch the stock’s uptrend support and its overhead resistance. If Ford stock price overcomes its resistance, it can really start to rally. The $9.50-$9.75 area could be reached in the short-term, if Ford stock doesn’t have too much trouble eclipsing the 200-day.
Ford Stock’s Dividend
Even though Ford stock has rallied off its $7.40 lows, it still has a monster dividend yield. Currently, Ford stock pays out 6.8% annually. Many investors figured the dividend would be cut because of the high yield, but management has not shown any indication of taking such a step.
While some investors were disappointed that the automaker didn’t pay a supplemental dividend in January as it had done in the previous few years, that development was not all that surprising. Remember, at the time Ford stock had a regular dividend yield of about 7%. If that yield holds up — and all indications say it will — then investors can collect a meaningful profit from Ford stock, even if the shares stay flat.
With the favorable charts and the high yield, investors could put themselves in a strong position if Ford stock rallies. Such a rally would give them a low-cost basis on a high-yield stock, something all income investors love to have.
Ford Going Autonomous
During the Detroit Auto Show in January, Ford announced a partnership with Volkswagen (OTCMKTS:VLKAF) on trucks and vans. However, the companies looked poised to hold more talks on the issue. Then in February, the two companies reached a deal to work together on autonomous vehicles, and Volkswagen made a $1.7 billion investment in Ford’s Argo subsidiary, which has developed an artificial intelligence system that F is using in the autonomous cars it’s developing.
The deal — which was for roughly $600 million in Argo equity and $1.1 billion of working capital — valued Argo at $4 billion. Remember, Ford bought Argo for about $1 billion back in August 2017.
This is reminiscent of General Motors, which bought autonomous-vehicle startup Cruise for a reported $1 billion in August 2016. Then in 2018, it received investments from SoftBank (OTCMKTS:SFTBY) and Honda Motor (NYSE:HMC), which valued the unit at $14.6 billion. I don’t know if or when Argo will reach that figure, but Volkswagen’s investment is a solid first step.
If another investor steps up and pours money into Argo, I imagine its valuation will increase again. For a company like Ford, with a $34 billion market cap, an asset going from a $1 billion valuation to a $4 billion is a big deal. For instance, at $7 billion, Argo is suddenly about 20% of Ford’s market cap.
That can create a lot of value down the road if the investment pans out.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
