Dancing in Detroit (F,GM,HYG)

Dancing in Detroit (F,GM,HYG)

What’s more American than a monster truck hoedown that pits a Ford F-150 against a Chevy Silverado.  (Apologies to Ram fans, of course.)

 

American carmakers are still a force to be reckoned with 100 years after Mr. Ford’s assembly line thrust Detroit into the center of the industrial world.

 

And though we may be at the dawning of the electric age for vehicles, Ford and GM still have market caps that come close to $50 billion.

 

Why?

 

Because they sell a whale of cars.

 

A look at the chart below offers an idea of the types of numbers on offer from both companies.

A company that sells more than $150 billion in product is a force to be reckoned with, even if the stock is waggling and the competition looks slicker and sexier.

 

So which one is better?

 

The question often arises in our monthly, inner-sanctum bourbon and billiard gatherings – for which Normandy is gaining notoriety from the White House’s West Wing to the Financial District’s White Horse Tavern – ‘which is the better buy: Ford or GM’.

 

And we have an answer to the question.

 

But it’s not what you may think.

 

Before we get to it, though, consider a few of the following key metrics.

 

  1. First, P/E. Both stocks trade with diminutive multiples, Ford at 11.87x last year’s earnings, while GM goes for a measly 5.25x.
  2. Dividends are also ample, with Ford delivering 5.40% and GM paying out 4.48% annually.
  3. Book value per share is another figure we lean heavily upon. For Ford, it comes in at 1.44, while GM’s is just 1.11.

 

Those are fundamentals that it’s very hard to argue with, particularly GM’s.  And while Ford’s annual payout is superior, there’s a lot of speculation regarding whether it can be maintained.  At this point, it’s anyone’s guess.

 

What is clear is that Ford stock has had a rough time keeping up with GM’s performance for better than a year now.  The two traded more or less in line for several years prior, but as of last summer, the divergence grew stark.

 

A look at the chart below makes it clear.

Ford shareholders have suffered.  And even with the recent announcement of a shakeup at the very top, the stock has not responded.  There’s been little in the way of strategy or new direction from the nascent leadership that has invigorated investors to want to close the gap with GM.

 

And we’ve our doubts that there will be.

 

Not that they can’t, but we see a far better chance that traders will recognize the tremendous ‘value’ on offer from GM shares before they appreciate that Ford has managed to climb back into the game with GM.

 

On the other hand, we can’t be sure how long it’s going to take the market appreciate GM’s inherent value.

 

The stock is cheap, yes.  But it has been for a while.  And it could remain so.

 

Catalysts Large and Small

 

One push on the horizon might arrive as early as next week, when GM shareholders vote on an initiative by Greenlight Capital to split GM shares into two classes, separating the company  into a dividend paying corporation on the one hand, and a ‘growth’ driven entity on the other.

 

Whether it works or not is less material for us, as the fallout from the vote will surely encourage a great number of market players to have another look at the stock.  And that publicity in itself could forge a breakout for the shares.

 

Is it already happening?

 

A look at the daily chart for the last six months (below), shows a number of constructive developments – possibly in anticipation of a favorable outcome in the voting next week.

 

Have a look –

To begin, GM’s moving averages unfurled higher in mid-March for the first time since December 2013 (red arrow), and while price did back off considerably since the March highs, it still managed to hold above the long term moving average (in yellow).

 

Since bouncing off that line, it has popped above three of the stock’s four salient moving averages.  A boost to the $35.50 level – where the 137 day moving average currently lies – would make us outrageously bullish on the shares.

 

It’s still too early to predict when or if that will occur, but the signs of an imminent push higher are there.

 

Look at RSI, which just this week snuck above its midway waterline as the stock bounced higher.  MACD is just a few days from confirming RSI’s bullish action, and so long as the shares can hold their most recent gains, that should happen no later than next Tuesday or Wednesday.

 

Any move below the gathered long term moving averages at $33.00 would call our hypothesis into question.  While any action above that level would confirm that the move lower from March (from $38.50 to $32.00) was simply a retest of support.

Before we get to this week’s bet, however, we have one trade that requires your attention.

 

We’re going to immediately recommend that you shut down your February 16th initiative.  The letter was called How You Feelin’?, and in it we urged you to sell the iShares iBoxx High Yield Corporate Bond ETF (NYSE:HYG) September 15th 86 PUT for $2.65 and buy the HYG September 15th 86 CALL for $2.23.  Total credit on the affair was $0.42.

 

And today?

 

Things are looking anything but junky.  The long CALLs are trading for $2.60 and the short PUTs for $0.96.  Sell the former and buy back the latter and you pull out $2.06 on exactly nothing laid out.  Adjusted for minimal commissions, that’s a 1273% profit.

 

Shake the bell, Drain the swell, and

Dance yer bucket o’er hill and dale!

 

Today’s motor vehicle scheme comes to you in the best way we know how, and that is, by betting on GM outperforming Ford over the intermediate term.

 

And how do we do it?

 

By swapping the cost of a GM long against the proceeds from a Ford short.

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Pay close attention to those expiries.  There’s a year play on the long Ford PUTs!

 

Many happy returns,

 

Matt McAbby

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