Ford Motor (F)

His preference is for auto parts companies rather than auto manufacturers. The large auto manufacturing company growth rates are rather flat but auto parts companies sell more and more parts into cars each year. LNR-T has been his preferred player in this space and he also has some MG-T.

This has rallied from about $10 to a little over $12. It’s had a good bounce. The group has been coming back into favour, however it’s probably not the strongest in the group. If he had to pick one automobile stock, it would probably be GM. They both could face some structural problems if this EV thing continues to come, as it looks like it is going to.

The auto sector has a very, very strong seasonality in the spring time. That is when the big car buying season occurs. This year it wasn’t so much. Technicals are not looking very good. The stock is in a distinct downward trend. It recently broke below a new support level. Wait until spring of next year.

Trading at 6X earnings. However, it may be the peak so earnings may come down. Both this and General Motors (GM-N) are looking to invest outside the traditional internal combustion engine. Looking at electric vehicles and looking to compete with Uber and Lift. They are doing all the right things. Unless car sales drop to something like 10 million a year, he thinks you are okay holding these. You are not going to get a lot of growth, but it is something like holding a bond-like issue with an excellent dividend. He sees more dividend increases from both companies. 5.6% dividend yield. He prefers General Motors.

He does not own any of the actual manufacturers. This one has been a bit of a laggard.

A tough space, simply because auto peak sales have shown themselves in North America. There is some resurgence in auto sales in Europe and emerging markets. Although this company is doing well on a unit basis, it isn’t doing all that well on profitability. The good news is that they are coming out with a refreshed F150, their backbone, which will be good for them.

He owns no auto stocks, but is warming up to them. North American production is plateauing and possibly weakening. However, it is at such a high rate that it is profitable for them. In Europe economies are coming back and auto sales are picking up. GM-N pulled out of Europe.

He likes a lot of the auto companies. F-N, however has too low a return on capital. They have so much debt be would have to pass on it. He prefers the parts companies, as they have better return on capital. He likes GE-N better than F-N.

A conundrum. Cheap on a PE basis, Price to Book, and even on a quality to balance sheet basis. However, what is the outlook for auto sales? He hears it is fairly bleak. Car lots are rapidly filling up with inventory, including used cars. This is different than General Motors (GM-N) which is going gangbusters in China. If you own these, you might have to wait for another auto cycle.

He doesn’t like autos. This has been a very tough position to hang onto. It has a pattern of lower highs and lower lows, and that is not what you want to buy. At some point, this could be a value pick with a very long-term horizon, but that is not what he does.

If you’ve been a shareholder of this company, it is probably the most frustrating stock in your portfolio. Ridiculously cheap from a valuation standpoint. They pay out a huge dividend. Their balance sheet, excluding Ford Financial, is very, very healthy. Has more cash than debt. They are committing capital for electric cars in 2020 and 2021. Doing everything the Trump administration would want. Car sales in the US are now sub 17 million on an annualized basis. Investors are fearful that the car market is rolling over and that the segment is slowing down. At current prices, this looks really attractive.

Just announced that they are reducing employees, probably more of the white-collar staff. He is a little concerned about the auto industry in general. It is a very competitive business. Gasoline prices have been cheap, which has helped. He thinks the industry is at the top of its cycle right now, and from here on things are not quite as happy as they had been in the past. He would stay away from the auto industry.

Yielding 5.5%. The auto industry almost went bust and had their dividend eliminated a decade or so ago. This sector has never been a great place to invest. It is highly cyclical and very capital intensive. Also, consumers are shifting behaviours with ride sharing, which is having an impact on long-term auto sales. There are better places to go.

Over the long run, this has not been very good to investors. Highly indebted. It costs a lot to build cars, and it’s deeply cyclical. He doesn’t like deeply cyclical stocks.

It seems like there are a lot of concerns by investors that we are getting into the late innings of this market cycle. If there is a recession around the corner, what does that mean for highly cyclical companies? We are getting very low valuations on the Sell side. These companies have all dramatically reduced their costs, so that they are breaking even. We are currently at 17 million vehicles, and their breakeven is 11 million, whereas, historically it was a lot higher. Investors will find that earnings will hold up a lot better than what is expected, so that is an opportunity. The question is, do you want to own a cyclical going through a downturn?