They say that it’s important to invest for the long term. Investors who are long Ford (NYSE:F) stock will now have the opportunity to test that theory. This Covid-19 correction hit auto stocks especially hard. Ford stock is down to its 2009 levels. Even the mighty Tesla (NASDAQ:TSLA) fell as much as 60% from its 2020 highs. General Motors (NYSE:GM) set a new low under its re-IPO after the financial crisis.
Panicking out of F stock at these levels could be a mistake. There should be opportunities for this iconic American auto manufacturer.
But management needs to re-earn some respect first. Lately, it seems like Ford’s management team can do no right, so Wall Street lost its faith in the team. This is nothing against the operational efforts on the production lines — this critique is centered on the strategic level. Ford still makes nice cars and trucks, they just need better leadership.
Meanwhile, analysts like UBS and Barclays have also panicked as they cut its price targets. This morning F stock is above their new price. Ratings agency Fitch also lowered the company credit rating. I am not as pessimistic because this is an unusual period that will not continue for ever.
It is only fair to point out that this correction here is not all entirely Ford-specific. Wall Street as a whole is in panic mode over the global virus lock-downs. Leaders everywhere decided that the best way to fight it is to shut down everything. Unfortunately, by doing so, they guaranteed us a worldwide recession. To avoid a depression, they will have to spending trillions of dollars. Panic like this is never a good first-effort strategy. We will be paying the price for their mistake all year, if not longer.
This is all to say that there are upside opportunities in Ford stock but there is no guarantee that this is an absolute bottom.
The F Stock Recovery Won’t Be Easy
This week will be pivotal because America will find out on Thursday how many people filed new jobless claims last week. Assuming that the reports are accurate, the number should jump from 270,000 to well over 1 million. Investors will panic again over this, especially if the actual number is even bigger than the estimates. For this reason and other headlines, this bottom is a process and not likely to be v-shaped because there is tremendous economic damage.
Almost every business on the planet is completely or partially closed. Many working people will have no or much smaller paychecks. This setback could last months. Consequently, the central banks have deployed a ton of quantitative easing. Meanwhile, the politicians are still bickering over which bill to pass — they have failed at it twice already this week. Even with the urgency of millions of Americans not being able to cover their bills this week, Republicans and Democrats still can’t set aside their differences.
As usual, they will eventually pass it, but for now they are being children about it at their expense of citizens.
Ford Has Value But It’s a Matter Of Convincing Wall Street
Fundamentally, value will not be a problem for F stock. It now sells at 0.2 time it’s yearly sales and at 0.8 times its book value. Their profit and loss statement will be wacky for a while, so it’s futile to judge its price-to-earnings ratio now. They have already halted their dividends and tapped into their credit lines, so that headline risk is out, but it was necessary so they can hunker down for this tough test.
This is where fans of the company need to step up and buy it on faith that management will eventually steer the company out of this deep hole.
The auto industry has enjoyed a long run of record yearly sales, but that would most likely come to an end this year. If people can’t pay their current bills, they are not going to be upgrading vehicles. So I caution against total blind faith that F stock will rally to prior levels soon. That means risk size is important.
Patience will be the key to success in the long run. It is best to take small bites of this stock on bad days, rather than a full meal all at once.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
