By David Goodboy
I am a confirmed contrarian when it comes to the stock market. Investment contrarians take the opposite position of the prevailing wisdom when it comes to choosing stocks, buying picks that no one else seems to want.
Bad news is a contrarian’s best friend, as it pushes prices lower into the deep-value zone. But even better is good news that results in a selloff.
Many times, positive earnings or other good news is not quite good enough to satisfy investors who expected more. Shares are dumped despite the seemingly positive news, depressing prices. Savvy contrarian investors wait for these selloffs in the face of improving fundamentals to build long term positions.
The iconic American automobile company Ford Motor Company (NYSE:F) is set up to be such an ideal contrarian buy right now. The overall bearish sentiment combined with bullish fundamental and technical metrics has skewed the risk/reward ratio solidly to the reward side.
Why Ford Should Be Your Next Buy:
1. Solid Fundamentals And Performance
Ford has just hit its highest free cash flow level in the last 10 years at just under $13 billion. Free cash flow is a very critical fundamental metric. In fact, as I argued in a recent article, free cash flow may be THE most valuable data to project the long term performance of a stock and the overall longevity of a company.
Ford’s substantial free cash flow led to over $3 billion in dividends in 2016, representing twice the amount it paid out three years ago. Right now, the company is yielding an impressive 5.4%. What makes these numbers very interesting is just over 26% of the free cash flow is currently allocated to dividends — a massive decline from the nearly 41% allocated just three years ago. This creates an opportunity for the company to keep increasing dividends, initiate a buyback, or even use the cash for acquisitions or innovation.Ford beat analysts’ estimates last quarter, with nearly $40 billion in revenue and earnings per share of $0.56. What makes me extremely bullish for the longer term is that Ford ramped up guidance into the $1.65 to $1.85 per share range for the year.
Factors powering this improvement include increased sales in the company’s F series truck line and a resurgence of success in the Lincoln line of luxury vehicles. F series posted its best second-quarter performance since 2001. Lincoln can thank China, alongside decade-topping sales in the United States, for an 84% sales increase.
High performance in Ford’s credit division also spearheaded the improved metrics, with a pre-tax profit of just under $620 million, marking a 55% increase from same quarter last year.
Despite the excellent performance, it is critical to note that net profits were flat compared with last year.
2. The New CEO
New CEOs can shake up legacy companies for the better. Jim Hackett is one such innovative leader. The auto company outsider and turnaround expert took the helm in May 2017.
I am very excited about Hackett’s vision and potential to completely revitalize the company. He is on the right track and it will just come down to his leadership ability to create a revolution within Ford.
Soon after starting, he embarked on an aggressive 100-day review of emerging-market operations, product programs, and autonomous vehicles.
Hackett has directly targeted Tesla as competition in a recent statement: “We do not have to cede our future to anyone, not to Tesla, not to anyone.”
Hackett’s experience is broad and profound. His experience includes leading Steelcase Inc.’s turnaround to become the world’s No. 1 office furniture maker, serving as interim Athletic Director at University of Michigan, and leading Ford Smart Mobility LLC since March 2016. He served on Ford’s board from 2013 to 2016.
Hackett, together with Chairman Bill Ford, will focus on three priorities: Sharpening operational execution, modernizing Ford’s present business, and transforming the company to meet tomorrow’s challenges.
In one of the more interesting moves to change the perception of Ford as a slow moving, bureaucratic organization, Hackett is considering installing basketball-style “shot clocks” in corporate meetings to force decisions.
“We are moving from a position of strength to transform Ford for the future,” said Bill Ford. “Jim Hackett is the right CEO to lead Ford during this transformative period for the auto industry and the broader mobility space. He is a true visionary who brings a unique, human-centered leadership approach to our culture, products, and services that will unlock the potential of our people and our business.”
Hacket added, “I am so excited to work with Bill Ford and the entire team to create an even more dynamic and vibrant Ford that improves people’s lives around the world, and creates value for all of our stakeholders. I have developed a deep appreciation for Ford’s people, values and heritage during the past four years as part of the company and look forward to working together with everyone tied to Ford during this transformative period.”
This forward-thinking leadership is what will catapult Ford into a global automotive leader for the rest of the twenty-first century.
3. The Technical Price Picture
One could not ask for a better technical buy signal. Ford’s stock price plunged to the 50-day simple moving average and has now started climbing higher, with the moving average acting as support.
The fundamental performance, combined with the new CEO and technical price chart, paints an extremely bullish picture for Ford stock.
Risks To Consider
Despite tremendous improvement in fundamentals, Ford’s shares have underperformed over the last three years. Worse still, auto loan numbers are trending downward, reflecting a struggling industry with declining sales. A long position in Ford is not just a bet on the company but a wager that the entire industry will turn around.
Action To Take
Buy Ford on a break of $11.30 per share with initial stops at $10.23 and a target price of $17 per share.
Disclosure: David Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.