As broader indices make new highs, Ford (NYSE:F) stock has also been going up. Since the lows seen in March, F stock has increased close to 85%.
Auto sales are cyclical and dependent on the economy. While analysts debate whether there might be a disconnect between Wall Street and Main Street, investors are wondering if the positive momentum in industrial shares such as Ford can be continue. Although the stock price is likely to be volatile in the coming days, I believe long-term shareholders may regard any dip in F stock price as opportunity to buy into the share price. Here’s why.
Long-Term Tailwinds for F Stock
Management: In its early days, the novel coronavirus pandemic was both a supply and a demand shock. Ford, like other manufacturing operations, went into lockdown earlier this year. The group had to suspend operations and close down dealerships not only in the U.S., but in other parts of the globe, too. Ford has no real revenue unless vehicles get shipped to dealers. At that point, the company becomes a cash-burning machine.
I believe the swift actions, especially regarding cash management, taken by management during the pandemic should encourage long-term investors. For example, the group axed dividends, decreased salaries of top executives and raised money in the corporate debt market. And as the economy has slowly started opening up, Ford has been back in business quite swiftly.
Brand strength: Ford was founded in 1903. It has therefore seen plenty of economic downturns, recessions as well as pandemics and even political uncertainty including world wars. Yet it has emerged from each one, in part thanks to the strength of the brand as well as the product offerings.
For example, as soon as global economies started opening up, the group reported encouraging numbers from sales in China, where its main partnership is with Chongqing Changan Automobile.
Management has also confirmed that the much-anticipated Ford Bronco will be coming in July. The new-product cycle will also include the immensely popular F-150 pickup.
In another development, CEO John Lawler has recently discussed Ford’s collaboration with Volkswagen regarding their joint-investment in self-driving car company Argo AI. Since last July, the two automakers have been teaming up to advance their foothold in autonomous driving.
Although this global partnership is still in its early days, I regard it as another testament to the progressive nature of Ford’s management.
What Could Derail F Stock in the Short Run?
Profit-taking: Although most investors are happy to see the equity markets improve, many are also wondering if the recent rally is for real or whether there may be another major leg down upon us soon.
Are you an investor who also follows technical charts? Then you may be interested to know that F stock charts are currently pointing to an overbought picture. Although a stock can stay overbought for a long, it is likely that some profit-taking is around the corner.
In the coming weeks, a pullback is looking increasingly likely. However, long-term investors could regard such a drop in price as opportunity to go long the shares.
On the upside, $8 is likely to act as resistance for now. Therefore, in the coming weeks, the stock will likely trade in a range between $7.5 and $6.
Economic contraction worse than feared: For the most part, F stock’s decline form its January highs of more than $9 already reflects expectations that our economy will be adversely affected by the disruptions due to the pandemic. The current debate centers around whether we’ve already seen the worst of the crisis or if economies in the U.S. and globally will take a long time to recover.
Ford employs approximately 188,000 people worldwide. Therefore, the fate of global economies affects its fortunes. Another wave of factory and dealership closures could easily put Ford in a financially difficult position. If we were to get new data that shows the economic contraction is much worse than anticipated, F stock could easily make a new leg down toward, possibly toward $5.
The Bottom Line
It has been an extraordinary year for consumers and investors alike. It may be premature to assume that the adverse health or economic effects of the pandemic are fully behind us. However, most robust companies have taken important steps to deal with the initial shock.
Therefore, even if there is another leg down in the market, either due to profit-taking or another wave of the pandemic or due to another completely new reason, robust firms will likely weather that next wave and downturn quite well, too.
Investors in F stock have been enjoying many days in the green. Thus there will likely be short-term profit taking in the shares. So if you are an investor with paper profits, you may want to take some money off the table.
Alternatively, you may also consider hedging your position with covered calls. For example, Aug. 21 expiry ATM calls would decrease portfolio volatility and offer investors some downside protection. It would also enable investors to participate in a potential up move following the earnings release.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
