A legacy auto maker focused on the future

Well, most of you might know that Ford Motor Co. engages in the manufacture, distribution, and sale of automobiles. Furthermore, you might have also heard that it operates through the following three segments: Automotive (Ford & Lincoln), Mobility, and Ford Credit. However, something that you might not know is that one of the major reasons why Ford has managed to become the iconic automotive brand that it is today and currently one of the largest automotive manufacturers in the world is the fact that Ford Motor Co. has devoted everything that it does on being different as a company and serving others. As the CEO of Ford Motor Co., Jim Farley, says “What makes this company different is that Ford has a higher purpose. We serve others and improve lives… We try to make the world a better place”

Ford believes in the power of creating a world with fewer obstacles and limits, where people have the freedom to build a better life and pursue their dreams. To shorten the distance between where you are and where you want to go. To connect people down the road and over the horizon — to discover possibilities, and enjoy the thrill, adventure and pride of moving freely.

The company honors its legacy as it builds the future – a better world for generations to come.

The recent strong Earnings performance combined with the increased demand for vehicles throughout Q1 2021 and the favorable outlook for the rest of this year have been some of the major fundamental reasons as to why we have decided to look at the company more closely. Furthermore, we attribute the increase in the demand for vehicles to the post-covid preference for personal mobility, which we believe is a very powerful trend that will continue to develop well into the future. Last but not least, widespread vaccination drive, optimism around federal aid and the gradual reopening of activities are also serving as major tailwinds.

The chip shortage and the next big thing

The automotive sector has been one of the most heavily hit parts of the economy by the global semiconductor chip shortage. As technology continues to advance and themes like autonomous driving, 5G, IoT become more widely adopted, the need for interconnected devices and systems will only continue to increase. Semiconductor chips have now become the bricks of the digital and electronic age economy, and when there aren’t enough bricks to go around, the construction process inevitably slows down. This is exactly what Ford and all other major auto makers have highlighted as a major short-term problem for their businesses at the moment. Ford is seeing extremely high levels of demand for its new models, but it is unable to meet this demand due to the production restraints coming as a result of the global chip shortage. The senior management of the company highlighted during its Q1, 2021 earnings call that the semiconductor shortage might even worsen, which will knock out roughly half of the automaker’s planned production for the second quarter. Analysts and CEOs in the industry argue as to how long could this shortage last with some saying that the situation will significantly improve in Q3 and Q4 this year, while others argue that it could take up to 12 months or even longer to do so. Ford doesn’t expect to get back to normal production rates until 2022.

This supply chain disbalance will inevitably hurt Ford’s profitability and cash flow in 2021. However, the company’s excellent first-quarter results highlight its potential to emerge as a much more profitable company in a year or two.

From a business standpoint, it is never a good thing to miss out on clients who are ready to give you their money, especially when you are an auto manufacturer, like Ford, coming out of a global pandemic. Ford Motor Company, did really feel the pain from shutting down factories and losing quality personnel during the COVID-19 pandemic, which resulted in a massive stock price depreciation and a lot of uncertainty as to whether or not the company will be able to fully recover from this devastating economic blow. Ford’s senior management has done a tremendous job throughout the last year to prepare an impressive post COVID line up of new models for when the economy reopens. Ford’s CEO Jim Farley envisioned that there would be an elevated demand for vehicles as part of the global post COVID trend of personal mobility. The company has also completed a massive expansion of its EV division, which is expected to be a massive growth catalyst moving forward.

We got a more detailed analysis on the exact way that the shortage is affecting the company during its most recent Q1 2021 Earnings call. In actual terms the chip shortage cost Ford about 17% of its planned production in Q1r. Understandably, that was expected to have weighed heavily on its earnings, but the global nature of the chip shortage is crimping supply across the entire auto industry and demand for Ford’s vehicles remains quite strong. Furthermore, Ford was able to offset the lost production with higher pricing, on their most popular models, which has led to higher profits. In its core North American market, wholesale volume fell to 533,000: down 29% from the 753,000 wholesales Ford logged in the first quarter of 2019. Nevertheless, revenue fell just 9% compared to the first quarter of 2019, reaching $23 billion. This enabled Ford to post a $2.9 billion operating profit in the region up from $2.2 billion two years earlier giving it a stellar 12.8% operating margin.

Ford saw a really strong performance by its finance subsidiary, as it earned $1 billion before taxes. The massive stimulus programs in the US have reduced delinquency rates, while record used vehicle prices have led to a string of gains for the leasing business.

The stock has taken in our view an unnecessary beating since the Q1 Earnings call took place, as a result of the relatively weak forward guidance that the company gave due to the chip shortage in the automotive industry. Ford said that it expects a $2.5 billion hit from the chip shortage, limiting its full-year adjusted operating profit to between $5.5 billion and $6.5 billion. Considering that the company posted an adjusted operating profit of $4.8 billion last quarter, this implies very weak profitability for the rest of the year. We definitely see this as a meaningful fundamental story that will undoubtedly affect the company’s performance in the coming quarters. However, it is important to remind everyone that the stock market is a discounting machine of FUTURE growth and earnings expectations. The future 1,2,3 years ahead looks very bright for Ford Motor Company and we believe that the current stock price doesn’t reflect that growth potential adequately. Smart investors know that it is always a good idea to buy into a stock that has a rock-solid long-term story but it is experiencing short term problems as usually that’s when great discrepancies between price and value could occur. We believe that most of the negativity related to Ford’s chip struggles has already been priced in. Once investors start to realize that in the coming weeks the stock will move substantially higher.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals and technicals as well as other all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether F is a good stock to buy with respect to the current levels of the price we have decided to analyze the performance of both the SPY (Select Sector SPDR S&P 500 ETF Trust) and the XLY (Consumer Discretionary Select Sector SPDR Fund). The two ETFs share a very strong and positive 94% 10-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty. The SPY is the largest, most liquid and most commonly traded ETF out there that invests in the 500 most well-capitalized companies in the US, and by doing so it mimics the performance of the S&P 500 benchmark index. The stock is not one of the Top 50 holdings of the SPY ETF and that should definitely not be taken as a negative, but rather as a great opportunity to buy into the stock before the market reprices its future growth prospects accurately. The stock is also the 14th largest holding of the XLY ETF with its 1.19% weight.

By looking at the daily chart, one could see a very similar movement on all the SPY, XLY and the F charts from throughout the last year. Due to the coronavirus outbreak back in 2020, the SPY made a 35% correction, dropping from its highs at $339 towards the key support at $221 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY has appreciated with 62% in 5 months and 91% in 14 months. There has been a lot of speculation and discussion recently as to whether or not the market has entered into a post COVID bubble of inflated asset prices. However, as we know the technical charts usually reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment. We believe that the first major correction will take place as soon as the Federal Reserve mentions the word “tapering” with respect to its quantitative easing program. We all know that the monetary policy of the future will be tighter than the monetary policy of today, it’s just that no one knows exactly when the Fed will announce that it is planning on initiating the tapering process. The most recent NFP report came in significantly below economists’ expectations, which means that the Fed will not see any further pressure of raising rates in the coming month.

Similarly to F and XLY, the SPY experienced a downward corrective movement in mid-March, 2021 that took the price down with around 3-5%. However, unlike Ford the SPY and XLY uptrends resumed shortly thereafter and pushed to new all-time highs. The SPY ETF is currently sitting at the $422 mark after rebounding from the strong dynamic 20 DMA support at $415, which also overlaps with another horizontal support positioned at $412. Corrections are a healthy sign for every bull market, as they allow market participants to reposition themselves. We must also note that the main reason for the last couple minor corrective movements was the broad sector rotation that we saw in the market where capital was circling away from growth stock and into the cyclical and value oriented stocks out there. This made some of the largest tech and growth-oriented names vulnerable in the short term, which indeed resulted in a heavy decline in the broad XLK sector. The XLK ETF is the largest and most influential ETF after SPY and the significant XLK underperformance earlier in the year did indeed affect the broad market ETF negatively. However, things stabilized in the market and bulls came back to support the uptrend.

The XLY also saw major declines both in February and March this year, but has been able to stage a remarkable comeback throughout the last 4-6 weeks. The ETF had an impressive run from $160 up to the $180 mark and after now after a 2-week sideways price action, we believe that the XLY is setting up the stage for another major breakout to the upside. Our month end target for the XLY is placed at $195.

In conclusion, the Dow Theory 2.0 clearly shows us that there is a lot of bullish momentum in the market at the moment. Furthermore, it is clear that Ford has under-performed both the SPY and XLY since March, and with a 94% correlation between the two ETFs it is clear that both of them are headed higher. Thus, we are strongly bullish on Ford in the coming weeks, as we believe that it is very well positioned to produce remarkable stock gains throughout Q2.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months taking the price from the March 20th, 2020 lows of $3.96 to the $13.62 52-week highs in mid-March, 2021. This represented an outstanding 244% gain for the stock in less than a year. However, the road to the above-mentioned all-time highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were few 10-20% corrective movements that took place during this strong uptrend, but the uptrend remained intact on all occasions. The stock has continued to attract a lot of investors’ attention as it remains one of the leaders in the automotive industry. Ford Motor Company not only has a multi-decade history of being a major player in the sector that it operates in, but more recently it has also managed to make meaningful steps in its Electric Vehicle segment. This in turn has turned the stock into a go-to choice for both small retail and large institutional value and growth oriented investors looking to add some cyclical as well as EV exposure to their portfolios.

The stock is currently sitting at $11.82 per share, which is roughly 13.2% below its 52-week highs of $13.62 per share. We saw the stock recently finding a lot of buying interest around the $11 mark, which has now happened 5times in the last 4 months. There is obviously a strong horizontal support lying there, as well as a diagonal uptrend support plus two separate multi day moving averages (50 DMA and 100 DMA) which have all continued to bring a lot of buyers back to the market every time the price drops there. In the aftermath of the Q1 earnings call where the company talked about the production challenges that it faces as a result of the global chip shortage some investors saw that as a reason to start selling the stock, which resulted in a short-term decline from $12.60 down to the $11.14 strong support zone. The thing is that we believe that the most recent post-earnings decline came after the company announced something that everybody already kind of anticipated – that the current chip shortage will significantly impact the company’s Q2 financial performance.

As you know and as we have mentioned many times before, panicking has never made anyone any money. While we understand that Ford will be experiencing pretty serious challenges and difficulties in the coming quarters, we still think that there was much more positive information as well as future growth catalysts mentioned on the Earnings call, which were completely disregarded by most investors out there. In addition to that, F is a cheap stock from a value perspective, and if you look at the financial metrics and ratios of the company, you would quickly find out that even without all of the hyped up and expected EV segment growth, the stock is still pretty damn cheap. When you add the realistic opportunity for Ford to challenge Tesla as the leader in this space down the road, this makes the stock an incredibly strong buy at current levels. It is important to note that this is a classic value stock with high-growth elements, that continues to report remarkable numbers of new orders, deliveries and models in the fast growing EV market. In investing, the better growth opportunity that a certain stock represents, the more expensive it tends to be as investors are pricing in that future growth into today’s price. And if you don’t believe us just look at Tesla’s P/E multiple. Yet, Ford is absolutely cheap! This means that the market is still unable to price adequately all of that future growth potential that the company has.

Investors should see the recent price declines as an opportunity to buy into one of the leaders in the automotive space and a potential EV leader at a 13% discount. In our view this is definitely an opportunity that every growth oriented investor should look at. We believe that the recent declines are heavily overdone and that the stock will find enough buying interest at the current levels, in order to resume its uptrend. Could the stock go lower? Of course it could.. any stock could go lower, but that is not the point. As a growth-oriented investor you have to be ready to take on some pain (stock price declines) from time to time when you are chasing after the high double-digit annual growth. Basically, this is the price you have to pay for owning these names. However, with the proper risk-management and portfolio positioning, this short-term speed bump could prove to be a phenomenal opportunity for generating outstanding profits in the months ahead.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of the big tech names as well as other market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLK, XLY will be some of the best performing US sector ETFs in May. However, it is important to note that the loose monetary policy with artificially low interest rates and constant money printing is a net negative for the US dollar in the short term. Thus, we are bullish on Emerging markets, in the next 2-4 months as most of the emerging market economies have US dollar denominated debts. If the US dollar continues to weaken that would make it easier for some of these emerging economies to repay their debts. Why is that important for Ford? Well, this trend might lead to a pick up in the international sales segment for the company. However, as we continue to see the US economy recovering and we move pass the global pandemic the Federal reserve will be forced to raise the benchmark interest rates in the US, which will end up boosting the dollar and could result in an Emerging market debt crisis in 6-12 months. This is the main reason why we decided to include the EEMiShares MSCI Emerging Markets ETF in one of our ETF Correlation Analyses for the month of May.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and resurgence of new cases, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. Ford Motor Company, has definitely been one of the biggest winners in terms of stock price appreciation throughout the last 12 months, thus we are strongly bullish on F’s stock in both the short and long term. Additionally, we are seeing Ford as a great way of playing both the reopening of the economy as well as the major EV boom that is currently happening without having to pay the crazy P/E multiples of the likes of Tesla and some of the other companies in the space. The most recent price corrections should be treated as a great opportunity to buy this strong performing stock at a remarkable discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from their overbought conditions and are now steadily pushing higher, thus signaling that the uptrend might be returning pretty soon. In addition to that, it is important to note the fact that the XLY and the Consumer Discretionary sector as a whole would continue to attract a lot of the investors’ attention moving forward, as consumers are sitting on record levels of savings and are eager to spend. This makes us optimistic for the future performance of Ford as a meaningful part of the ETFs structure. Our analysis shows that as a result of the great leadership by the senior management of the company and the phenomenal fundamental positioning of Ford with the large number of growth-related initiatives, new models and price adjustments the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy the stock at a 13% discount from the 52-week highs, we would like to point out that buying at these levels would be suitable for both risk-oriented and risk-averse investors. Thus, we are currently looking at the $11-12 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $16 and $18.50 respectively.


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