Poet Thomas Tusser is credited with the expression used in the title of this article:
A Fool and His Money Are Soon Parted.
There are two versions of this mantra specifically related to investing that are quite apropos at this juncture. They are:
In bear markets, stocks return to their rightful owners.
Attributed to JP Morgan, and cited by Seeking Alpha member PT Larry in my previous article on Ford Motor Company (NYSE:F). And Warren Buffett’s:
The stock market is a device for transferring money from the impatient to the patient.
Buffett’s maxim has even more relevance to me due to the fact I was actually born and raised in Omaha, Nebraska, his birthplace. My father, also a stockbroker, instilled similar investing principals as the Oracle of Omaha’s. My dad always said, “Patience equals profits.”
Now that we have the pleasantries out of the way, let’s get down to business.
Thursday’s Bad News
Both Ford and General Motors Company (GM) were downgraded by Wells Fargo Wednesday. The bank believes increasing raw material costs and macroeconomic factors will diminish the attractiveness of the automakers’ EV efforts. The bank’s senior equity analyst, Colin Langan, wrote in a note to clients:
“The market likely underestimates the permanence of recent raw material price increases and is not factoring in the impact of the recent aggressive US fuel economy regulations. As a result of both factors, Ford and General Motors will be forced to sell BEVs to meet CAFE standards regardless of profitability.”
He added that similar regulations forced General Motors from the EU market in 2017. Now that the US is taking more European-like stances in terms of auto and emission regulation, such an uneconomic scenario could play out in the automakers’ largest market. Langan concluded:
“We are concerned that 2022 could be the peak for profits. It will be increasingly forced to absorb BEV losses to meet high 2026 US regulatory hurdles.”
Langan slashed his price target on Ford from $24 to $12 while downgrading it to a sell-equivalent. Nonetheless, the markets and Morgan Stanley analyst Adam Jonas had quite a different take on the situation Friday. Here is why.
Friday’s Good News
Ford is up over 9% at the time of this writing on Friday, trading at $13.50, providing a nice profit on the position in short order. Morgan Stanley analyst Adam Jonas advised that the risk/reward dynamic has finally reached a balance in a note to clients on Friday. Jonas stated:
“We are Equal-weight both Ford and GM during a highly uncertain economic environment and extraordinarily high dispersion of outcomes.”
On the positive end, Jonas noted that both companies have been able to pass on much of their cost increases to consumers, and pent-up demand remains strong as “dealers report strong conversion rate from show-room traffic.”
Meanwhile, more negatively, he surmised supply chain shortages could continue to eat into margins, energy price shocks could hurt demand, and falling used car prices could pressure each company’s captive operations finance. Jonas concluded that the balance of factors leaves the stocks in “limbo” at present.
However, Jonas too upgraded Ford from “Underweight” to “Equal-weight” after its recent selloff, implying the bad news is already priced in. Despite the tepid review, shares of Ford rose sharply Friday. All I can say is, thank you very much, Well Fargo!
The Contrarian Mindset Makes Money
I love it when analysts come out with these types of notes. The fact of the matter is, they are often late to the game and overly bearish. Wells Fargo isn’t telling informed investors anything they didn’t already know. But thank you, Mr. Langan, for setting the bar so low. The Warren Buffett stated so eloquently:
“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
Many times, not always, it pays off big when you go against the prevailing rhetoric and buy when everyone else is selling. The fact of the matter is, contrarians tread in to dangerous places where others fear to roam. High risk equates to high reward. Let me explain.
at 10th Mountain Contrarian Lesson Learned
As a Winter Warrior with the famed 10th Mountain division, I had a contrarian lesson instilled in me when reading about the unit’s famed first mission in World War II. The 10th Mountain Division was specifically formed to take Mount Belvedere in the Northern Apennines Mountains of Italy, held by the Germans.
This was a very important strategic piece of alpine terrain. In order to win the whole of Italy, the Americans needed to take the high ground. The US Army had tried and failed to take it several times before the Winter Warriors of the 10th arrived.
To take the ridge, the 10th Mountain would need to scale steep cliffs. The Germans had considered that so unlikely they didn’t bother to even protect the ridgeline.
This was a huge mistake by the Germans. The attack proceeded flawlessly, taking the Germans totally by surprise. By dawn, the Americans controlled the ridgeline, at the cost of only a single man wounded.
The point of this story is that sometimes even when the thesis seems completely sound and all are in agreement, it can still be wrong. As Mark Twain often said:
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
This is exactly the point I feel we are at with Ford. When the bearish rhetoric becomes so overwhelming, it is a sure sign the stock may be close to a bottom. Basically, you run out of sellers. Shareholders that bought in at much higher levels have effectively thrown in the towel and moved on.
Nonetheless, the underlying company needs to have a solid growth story and strong fundamentals. Ford fits the bill. Now, let’s perform an in-depth review of the valuation fundamentals.
The stock passes a review of the valuation fundamentals with flying colors. According to Seeking Alpha data, the stock’s valuation gets an overall grade of A-.
Seeking Alpha valuation Metrics
As you can clearly see, the stock is trading for a song at present. It is at a fraction of sales at 0.37 and just slightly over book value at 1.04. What’s more, it is trading for a mere 5.19 times forward free cash flow. Anything under 15 times free cash flow is traditionally considered vastly undervalued.
Look, I get it, this “undervaluation status” has been a persistent condition for the stock. Yet, I posit the tide is about to turn with the advent of the new Ford EV lineup, led by the Ford Lightning Pickup.
Even so, no one thinks the stock can break out. That’s exactly why I believe it will. Moreover, at these low levels, all the bad news is already priced in, giving you a solid margin of safety regarding any further downside risk.
Next, let’s review Seeking Alpha’s overall Quant rating for the stock.
Ford’s Quant Rating
Seeking Alpha’s Quant Ratings are an objective, unemotional evaluation of each stock based on data, such as the company’s financial statements, the stock’s price performance, and analysts’ estimates of the company’s future revenue and earnings.
According to Seeking Alpha’s objective quantitative evaluation of the data, Ford is a buy. The buy rating is based on positive valuation, growth, profitability, momentum, and revisions data.
I am a data-driven investor at heart, with a little intuition sprinkled in, along with a love of the product and the CEO’s no-quit winning attitude. Plus, I have a long history with Ford as their auditor and consultant while working with Ernst & Young.
Now let’s wrap this up.
The Wrap Up
Look, Ford faces stiff competition and is not a slam dunk-type investment, for sure, particularly at this juncture in the market. I never allocate more than 3% of my portfolio to a speculative position such as this to start. Further, I always layer in to that 3% to reduce risk.
There is a fine art to catching falling knives. It entails keeping the position a small portion of your portfolio and layering in overtime to reduce risk. You want to have plenty of dry powder left if the stock continues lower.
My overriding Winter Warrior investing motto I learned from my father is “patience equals profits.” Take your time and wait for buying opportunities to present themselves, and do your own due diligence. Those are my thoughts on the matter, I look forward to reading yours.
Your Input Is Required!
The true value of my articles is provided by the prescient remarks from Seeking Alpha members in the comments section below. Do you think Ford is a Buy at current levels? Why or why not? Thank you in advance for your participation.