Rising Star Buy: Grabbing More Ford

This article is part of our Rising Star portfolios series.

The way I'm adding positions to my Messed-Up Expectations portfolio is to buy companies in one, two, or three steps, each step approximately the same size. The riskiest companies will only see one purchase, while those that I judge to be less risky will get two or, possibly, three purchases. Thus, I'll only purchase SUPERVALU once, Western Digital will probably remain at two purchases, but I'd like to get a third purchase of Power-One at the right price.

Handling it this way, I believe, lets me size the positions for risk level, being hurt less if the risky ones crash and burn. Plus, it helps me avoid the emotion of greed, trying to grab the whole position in one big bite just before it rockets to the moon! I've got to get in NOW! <pant, pant> Heh, see what I mean? What if I'm wrong? That's a dangerous path to take.

Just about three weeks ago, I bought the MUE portfolio's first position in Ford Motor (NYSE: F  ) and stated at the end of that article that I'd be looking to increase the position. Well, as Lewis Carroll's Walrus said, "The time has come."

Same ol', same ol'
Nothing's really changed since I first purchased Ford. Last night's share price is right around where I bought it at $14 and change. Recently, Ford has been growing monthly auto sales in the low- to mid-20% range. And, it's cutting back on incentives while selling more autos, which helps maintain margins. In January, it cut average incentives by 11% year over year. In February, it cut again, by just under 10%.

Company

Average incentive

Year-on-year change

Chrysler $3,052 (14.0%)
Ford $2,542 (9.7%)
General Motors (NYSE: GM  ) $3,732 12.0%
Honda Motor (NYSE: HMC  ) $1,979 8.9%
Toyota Motor (NYSE: TM  ) $2,003 11.0%

Source: Autodata Corp. Data reflects year-over-year changes during February.

Chrysler also kept with the pattern of lowering incentives, but GM, Honda, and Toyota all continued to raise them.

Expectations
About the only change since last month is that I now have the latest free cash flow numbers available, which I didn't before. Starting with $7.38 billion in FCF from 2010, last night's closing price of $14.67 has priced in just 2.5% of annual growth for five years, and 1.2% for another five years with nothing after that (discounting at my 15% hurdle rate).

Now I know Ford's a big and cyclical company, but that seems awfully low to me given the pent-up demand I pointed out last time and the possibility of grabbing market share from Toyota and Honda as they run into manufacturing problems at their Japanese plants.

Therefore, tomorrow the MUE portfolio will buy another round of Ford, increasing the position size from about 2% of initial funds to 4%.

If you haven't already, add Ford to My Watchlist, and then come visit me and others on my active discussion board to talk about this and other MUE stocks.

Fool analyst Jim Mueller owns a synthetic long option position in Ford and shares of Power-One, but has no position in any other company mentioned. He works for the Motley Fool Stock Advisor newsletter service. General Motors is an Inside Value pick. Ford is a Stock Advisor recommendation. Motley Fool Options has recommended buying calls on SUPERVALU. The Fool owns shares of Ford, Power-One, SUPERVALU, and Western Digital. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is never messed up.


Read/Post Comments (5) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 16, 2011, at 6:57 PM, motto12345 wrote:

    Jim--Please be advised that year 2011 has been designated by Senior Ford Management as the "Enormous Debt Repayment Year". Achieving an investment grade credit rating by 02-01-12 (the next possible upgrade date by Standard & Poor's) following the year end earnings announcement is the Company's top priority due to the fact that 1) most banks and many pension funds are prohibited from buying a publicly held company's stock which is junk rated. Ford is still two notches below investment grade, and 2) the investment grade credit rating allows Ford Credit to refinance its debt at far lower interest rates. Bear in mind that low cost available credit (enabling Ford Credit to offer 0 percent financing to consumers) drives consumer sales of vehicles, and 3) Senior management has recently been issued zillions in stock options. At 12-31-10, Ford had $19.0 billion in debt. I project that they will use $12.0 billion in cash flows this year to reduce this debt to $7.0 billion by 12-31-11. This should be sufficient to induce Moody's and S&P to provide them with an investment grade credit rating by 02-01-12. Following this date, the stock price should begin to move up steadily to match or exceed the price of GM. Do not expect much price movement in 2011. Few if any insiders are buying at this time.

  • Report this Comment On March 17, 2011, at 9:26 AM, doctorolds wrote:

    Ford has been a darling for "not taking a bailout" but they are going to have a very hard time competing, particularly with GM, who enjoy very much higher U.S. and world volumes. YTD 2011, Ford's U.S. market share has fallen 2.0%, from 17.5% in '10 to 15.5% in '11. GM gained 2.7%, rising from 18.2% to 20.9%.

    GM's product development was delayed about a year by the bankruptcy and they, as carmakers typically do, have raised incentives to move aging product. The GM pipeline is refilling, and they can certainly afford temporary incentives to continue to gain market share. They have $1,000/car lower interest costs, and GM's retail sales are rising at a much higher rate.

    Ford may have great plans, but they are poorly positioned for continued success and they have no control over their biggest competitor, GM, who is just starting to use their muscle to regrow market share.

  • Report this Comment On March 17, 2011, at 5:50 PM, halindrome wrote:

    I have bought into ford a few times over the past year, and I have been very pleased with the results. I think this is a solid company. Yes, they are going to buy down their debt. And yes, this will effect growth for a while. But I think that is all to the good. Foolish investors like this sort of behavior.

  • Report this Comment On March 17, 2011, at 7:32 PM, buffalonate wrote:

    I like GM and Ford. The product quality for both is both much higher than it has been in a long time. Their higher quality cars should have no trouble keeping their margins up. I have also noticed that the new models for Honda and Toyota are really boring which can only help the domestic car manufacturers. Most Americans really want to buy American made cars if you give them something worth buying.

  • Report this Comment On March 18, 2011, at 5:49 PM, TruffelPig wrote:

    Hey, I have started something like you after me and the market couldn't really agree on expectations and I lost like 5% because I was too fast etc. - I have started playing positions (for now with mostly 2 only, only in endocyte I have 3 to rotate through on up and down moves which will always be there). In F I have 2 positions and you are right, I might add to that one.

    I have parked the money for that position for now in BP.

    I am looking for a second position in DLB after I opened one at around $51 - if it goes lower than 45 I might add one but I think for now its at the bottom around 48 or so.

    So right now my portfolio (maybe I name it mega mess) is:

    2 CHK

    1 BP

    2 F

    1 SSN

    1 BBEP

    1 DLB

    1 BTU

    I know, it isn't balanced but I am careful going in Tech right now and for now Tech had to bite the dust (I had 2 ARRS but that is stuck at 12 for now).

    I am starting to look at SA (that is why I have DLB) and I am eyeing CGNX which is dropping into position for 1 position. I like to wait for Japan outcome though.

    What a chaotic comment...............

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