It feels like all of the hype surrounding Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA) has diverted attention from legacy automakers like Ford (NYSE:F). And because of this, my concern is that traders will miss out on a prime opportunity in F stock with the July 30 second-quarter earnings release.
As I’m writing this, F stock is trading at exactly $7 — and now, it’s just under that mark. The bull thesis is that the stock has been already been punished by the novel-coronavirus crisis. The fear and loathing have already been priced in, and the stock is due for a rebound.
However, rebounds usually don’t just happen without some sort of catalyst. That said, the upcoming earnings event could be that catalyst. If it’s an earnings blowout, then perhaps the trading community will take its eyes off of Tesla and Nikola for a moment and give Ford the attention it deserves.
A Closer Look at F Stock
There appears to be some importance attached to the $7 level when it comes to F stock. Prior to the pandemic, the magic number was $10. And now, $7 has magnetic power.
Not to be a conspiracy theorist, but I suspect that the options market might be involved here. Options traders have been known to “pin” stock prices to a number in order to achieve what they call “max pain.” And by moving the stock price to a particular dollar figure at options expiration, they can extract as much money as possible from retail-level options buyers.
That might sound crazy, but note how F stock briefly reached $7 in early June, only to get quickly rejected. It’s a cruel market sometimes, rife with head-fakes and dashed dreams.
Can an earnings surprise galvanize traders into bidding F stock above the $7 pain point? No one knows for sure, but low expectations can work wonders in setting stocks up for unexpected outcomes.
Beware the “Obvious”
When people start saying that something in the markets is “obvious,” that’s often your cue to bet on the opposite side of the trade. History has shown “obvious” outcomes to be wrong in many instances, such as Brexit and the 2016 presidential election.
So, when Morningstar analyst David Whiston declared that “Expectations are obviously extremely low…” regarding the American automotive industry, that might have actually been a good sign.
Sure, Whiston’s concerns aren’t anything we haven’t heard before. Yes, debt is a factor worth considering. But like many financial analysts, Whiston is too busy looking forward to effectively reflect on Ford’s second quarter:
“Ultimately what I want to know is how much of the debt can they pay off by year-end?… What’s the capital structure going to look at the end of the year?”
Aim Low for Best Results
Going against the analyst consensus is a daring move that’s not recommended for all investors. If done correctly and after plenty of due diligence, though, it can be a highly lucrative and satisfying expression of staunch contrarianism.
For the second quarter, the analysts expect Ford to record an operating loss exceeding $5 billion. They’re also bracing for a per-share earnings loss of $1.30, which is pretty steep for a $7 stock.
But wait, it gets worse: they’re also projecting a 59.85% year-over-year decline in quarterly revenues. That’s what I would call pessimism at its finest.
Meanwhile, it’s already public information that during the second quarter of 2020, Ford posted its best retail share in five years. The F-Series, Ranger and Explorer were particularly strong in this regard.
So if the analysts are front-loading a massively disappointing outlook for F stock, then I’m more than happy to recommend a long position. To a bona fide contrarian, that’s the “obvious” response.
The Bottom Line on F Stock
F stock might be pinned to $7 for now, but that can’t last forever.
If anything should serve as a breakout catalyst, let it be an earnings blowout — which, purposely or not, would only be helped by the most pessimistic analysts.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
