Earlier this year I advised Ford investors to sell covered calls against their positions.
As with any "contrarian" call, this was met with great skepticism. Many people did not seem to understand my advice, and I took a lot of flack for it.
Ford is a great company. The fundamentals are solid. The stock was breaking out. Auto sales were perfect. So why did the stock fail to get to more than $16?
But Ford, along with General Motors
Envision Ford as a boat, rather than an automaker, and picture Europe as an anchor. Anytime you begin driving a boat, it's easy going until you run out of slack on your anchor line.
Then all of a sudden the boat hits the end of that line and gets stopped. That's exactly what it's like with shares of Ford. You might see the stock run up on monthly sales figures but then sell off afterwards.
The good sales data -- or as of late, great sales data -- typically get baked into the stock price prior to the release. At this rate, a blowout number from automakers is generally expected. An in-line result or a disappointing one would send the stock right back down.
Although Ford is improving in Europe and CEO Alan Mulally still says the company is on pace to be operating with breakeven results by mid-decade, the automaker still lost more than $450 million in the region last quarter.
That's not exactly a promising figure considering it leaves the automaker on pace to lose nearly $2 billion in Europe for 2013. So by Mulally's estimates, Ford will likely lose about $1 billion there in 2014, perhaps a tad more. After all, mid-decade is a pretty broad measure.
Although technically mid-decade would be 2015, by most standards any time in 2016 would likely be considered mid-decade as well, generally speaking. Who knows whether shareholders have taken this into account.
Let's hope that Ford sees a quick decrease in its losses after it logs upfront expenses related to shutting down multiple European plants. During the latest conference call, management told investors that about $110 million of the $460 million in first-quarter European losses were due to restructuring costs from the plants.
Meanwhile, Ford is planning to sell fewer vehicles to rental agencies (sales usually made at discounts) and more cars to retail and commercial customers (who usually pay a higher price).
Put that together, and Ford appears poised to succeed under Mulally's plan.
However, until European operations can become less of a bleeder, and assuming domestic sales remain quite strong, Ford is a stock you don't want to chase. When stocks start to run, it makes you feel as if you've missed the boat, causing many traders and investors to chase the name.
But for now, the autos still have the European anchor weighing them down. Until that's gone, buy these names only on pullbacks. Taking it a step further, after there's a strong rally, don't be afraid to sell upward calls against your position. Best case is you keep the stock and collect the premium. Worst case -- if you can call it that -- is that your position gets called away at a gain and you once again, buy the inevitable dip.
At the time of publication, Kenwell owned shares of Ford.
-- Written by Bret Kenwell in Petoskey, Mich. .
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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