Wednesday, August 13, 2014

The Premise for Ford (F) Holds True

I wrote about a big position I took on Ford (ticker, F) stock on 6/6/14.  See: Big Bet On Ford Stock.  I am still bullish on the stock and own the exact number of shares as I did in early June, as the shares have not fallen below my cost basis for me to pile in again.  What has the stock done in a little over two months?

Ford reported great second quarter earnings, specifically citing an increase in auto sales coming from China.  They've also since reported that their European division is making a turnaround toward profitability.  F-150 sales continue to be the highlight.  Concerns for Ford include needing to turnover their factories for the production of the new aluminum bodied F-150s as scheduled, an unstable European investing landscape due to the fighting in Ukraine, hampering European markets, and a potential sub-prime car loan bubble in the United States.  The price of Aluminum has not been mentioned so I am assuming the metal has some price stability.  I will need to due my homework and read up on Alcoa (ticker, AA), one of the largest aluminum producers in the world.  Alcoa would benefit from a successful conversion by Ford to the lighter bodied aluminum F-150.

(Other intrinsic risks with owning stock of a car company include recalls and lawsuits from faulty vehicles.  Though it seems nowadays that a pile of money and a public apology can keep car businesses motoring on.  See Toyota Prius and various models of GM). 

This post has two objectives: 1) To teach you what a premise is when it comes to stock investing.  And 2) To share with you one of the pitfalls of actively selecting and monitoring a stock investment.

I always have a strong premise for every stock I purchase.  I also have an exit plan before I even take up a position.  I would equate investing without a premise or an exit to investing blindly.  Without some core belief about how a company (and subsequently its stock) should perform in the near future, you are doomed to lose money.  Notice I stated near future, and not some distant future.  The farther out you go, the less the probability of your premise holding true, like a spinning tire, if you overload it, it will warp and spin untrue eventually.  What happens when your bike tire spins untrue?  It hits the calipers, and you go flying over the handlebars.  The best premises come with some simple probability considerations.  Note: You do not have to be a math whiz.

Let's take the case of Ford.  Back when I first purchased the stock, I'd been following all literature reporting on their strategy and future plans to see the company continue to grow their earnings and cashflow.  My premise for Ford included the company Not needing to shut down multiple factories in the US.  Concerns over their worldwide centers alarmed me of course, but because we are in an economic recovery, other nations would soon follow and closures in other regions are to be expected for the time being.  So far, Ford has not been growing earnings by "cost cutting."  Cost cutting is how many companies have grown their earnings and they do this in many ways, layoffs, closures, etc.  Ford has not been cutting back recently.  They have stopped factory work and this has impacted sales, but this is because they cannot turnover their factories to aluminum vehicle production without actually turning off the machines!  What else was in my premise?  That Ford would improve sales worldwide.  They have more than met this expectation.  Both Europe and China Ford vehicle sales continue to shine and grow healthily.  Finally, my premise for Ford also included that they will execute the game plan for the production of F-150 aluminum bodied vehicles.  The company has not reported any setbacks thus far so unless they are hiding something, one can expect that they are on schedule.  Thus, this premise has three major parts to it and each one came with its own unique likelihood that I had to consider the opposite scenario for and weigh my chances of it happening.

What about the stock?  What has it done for me?  I reported on 6/6/14 (Big that I was up almost 5% on the stock.  Since June, the stock has risen to $18 and I was at one point up 10%.  However, the last week has seen a bit of a market correction and we are just now starting to trend higher.  I'm back to 7.48% as of today.  I'm disappointed in how the stock has performed considering the multiple number of positive stories (outweighing the negative ones) out for Ford.  The stock has been fluctuating between high $16 to mid $17's for some time now.  When will it break out?  I'm not a technical analyst so I can't give you a prognostication.  All I can say is that my premise for holding onto the stock remains strong, and there have been no reasons given to sell the stock.  I will Hold until next quarter.  They are due to report in October again.  My exit is priced to start at $22 and I plan on exiting, if all goes well, selling in blocks of 50 shares, hopefully riding the stock up over time.

Objective number two was to speak to one of the pitfalls about investing in stocks.  This pitfall is, namely, time.  Being a stock picker takes time and patience.  You need to love to read.  Sometimes I wonder if I were not better served just putting my money in a low-fee, index fund or ETF.  The myth is that you cannot beat the market with an index mutual fund or ETF.  Actually, you can and a lack of actively trading, eroding gains with fees, is one reason for it.  What about you?  Are you an active equities investor?  Have you considered fully whether or not you could be doing better things with your time instead of trying to beat the market several stocks at a time?  You could be spending time in other money making ventures!  Like me here, blogging for myself and the Nexregen REIT, Rich-Uncles.  Think carefully folks.  Time is of the essence!  Until next time.

Bored, people are getting fancy with their index fund investing now too!  They buy index ETF's weighted to some industry they perceive will do better in the coming months.  They call this, "smart beta."   

No comments:

Post a Comment

If you leave a link, I'll delete your message.

Note: Only a member of this blog may post a comment.