America loves a good turnaround story, the one where the hero goes off track, gets down in the dumps and then finds a way to rebound. It makes for good...
America loves a good turnaround story, the one where the hero goes off track, gets down in the dumps and then finds a way to rebound.
It makes for good movies, but it seldom makes for good investments.
And in the case of Ford and General Motors, two American corporate titans where everyone is rooting for something good to happen, it also makes for a Stupid Investment of the Week.
Clearly, selecting these two automakers this far into the cycle seems a bit like piling on — there is no joy in watching the big domestic automakers implode — but the truth is that the companies’ most recent bad news actually has incited some investors to believe the worst may be over. Moreover, when brand-name stocks like these get beaten to a pulp, average investors sometimes confuse price with real value, and start believing that any longtime survivor is automatically cheap when its stock price is at or in the single digits.
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Stupid Investment of the Week showcases the conditions and characteristics that make a security less than ideal for average investors, in the hope that spotlighting troubled thinking in one case will make it easier for investors to root out trouble elsewhere.
The column is not intended as an automatic sell signal, although it’s hard to believe that longtime shareholders in Ford (F) and GM (GM) will have big capital gains to worry about if they bail out now, as both stocks have been in the dumps for ages.
While it’s easy to see how far the mighty have fallen — both have shed enough value to have lost their mega-cap status and fallen into the mid-cap range based on the current prices — it’s also easy to see why there’s some measure of optimism about these stocks for the long haul.
For Ford — which recently took a $9 billion quarterly loss due mostly to a huge slug of write-downs — hopes for a positive future hinge on plans to double the production of hybrid vehicles in 2009, plus the conversion of three truck factories into small-car production factories. Sales of the Ford Focus show that the company can make a popular, fuel-efficient small car, and Ford has a healthy international business.
With GM, there’s also a good international story to tell, there’s a new labor contract that promises to make the company more competitive with its foreign competition, it has more models achieving 30-miles-plus per gallon of gas in highway driving than any other manufacturer, and it has also made what some analysts believe are great strides in the hybrid market.
In both cases, if the American market would suddenly warm up to the domestic manufacturers, it could fire up a recovery. That said, despite all signs that the quality problems that plagued the domestic carmakers in the 1970s and ’80s are long gone, American consumers still haven’t forgiven those past sins and come back to buying American.
The problem is that the good news for each company can be summed up in a paragraph, while the bad news would require a book.
“These stocks have become classic value traps,” says Morningstar analyst David Whiston. “There’s definitely a scenario where these stocks could be worth much more than where they are trading today, but that doesn’t make that scenario likely right now, and it doesn’t make the auto companies a good bet. These are still businesses you don’t want to own right now.”
Rather than rewrite the whole book on the problems with the stocks, investors should look at a few hot buttons that trump any buying case.
Simply put, no matter how much goodwill a corporate name carries, it’s hard to buy any stock where the trailing 12 months diluted earnings per share from continuing operations is a negative $82.19 per share and where the company’s total equity is a negative $41 billion (GM), or to invest in a company that has short-term debt of roughly $170 billion (Ford).
GM’s debt issues are such that the stock is owned more by its bondholders than by its stockholders; that’s a dangerous situation, because Wall Street has a rich history (pun intended) of companies heading into bankruptcy, protecting some interest of the bondholders and leaving the stockholders with nothing.
And that’s all before you ever factor in the economy, the lending crisis, high gas prices and how they all conspire to continue damping big-ticket sales for a year or more.
That’s not to say either of the automakers is destined for bankruptcy — I’m decidedly not with the camp that feels such a move is inevitable — but investors still need to be aware; it’s entirely possible that this story ends up with the companies being recapitalized, the good brand names surviving, but the shareholders holding the bag.
Having attended college in Michigan with lots of kids whose parents worked at the Big Three — and where the kids frequently hoped that would be their path, too — there’s no question that plenty of people in the past would have told you they would plunk down their life savings to buy Ford if it ever got to about $5 per share, or GM in the $10 range.
Today, they’re looking longingly at the names, but letting some measure of goodwill cloud their judgment if they still want to take the ride on these auto stocks.
“It’s just amazing how bad these companies are,” says money manager Brent Wilsey of Wilsey Asset Management in San Diego.
“They’re selling cars, but not making any profits. There’s no cash flow. Everything is still stacked up against them. … We want them to succeed and maybe things would be different with a decent economy right now, but a great name alone isn’t going to cut it. There’s no good reason to buy these stocks now, and maybe ever.”
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.