Ford Bonds Downgraded to Junk, Is the Stock Junk Too?
A company’s business prospects don’t matter as much as many may think, but they do matter, and matter more in some cases. Ford is going in the wrong direction here.
The economy may be humming along pretty nicely, but that doesn’t mean that all sectors are doing well. The car industry in particular is one of the ones that has struggled over the last few years, and when an industry is in decline, and you are in that industry like Ford is, this is simply going to affect your business in not so great of a way.
Bond rating agencies such as Moody’s, S&P, and Fitch look purely at business performance and outlook, and while this is aimed at the bond market, such things do spill over to a company’s stock as well to some degree anyway. This is especially the case with investors who are looking to gain insight into where a company may be headed in the longer-term, the term that they look at to decide whether to enter a position or hang on to a stock, or to perhaps look for greener pastures.
The market hasn’t really been bothered by Moody’s downgrade of Ford bonds to junk status, even though this is indicative of concerns about a company’s long-term health. This does not mean that we shouldn’t be concerned though, because while the market rules these kingdoms, they do change their mind and we want at least a sense of how they may do so in the future based upon how things are going,
The chart with Ford is an excellent example of how a shorter-term look may provide us with some hope as to how a stock may be faring, when we view it over a period of months, but when we step back and look at over a period of several years we may see a different story altogether.
It’s never a good idea to argue with the market on any time scale, but we do need to match our scale with theirs. If our analysis and market trends differ, if we think that things should be worse than they are, we never want to just go with our analysis because it is only valid if it is confirmed by the price performance that we are looking to predict.
There’s no question that Ford is struggling from a fundamental perspective and the numbers don’t lie. Ford did put in a positive earnings number with its latest quarterly report in June, but only managed 4 cents a share, off 85% from the same quarter a year ago. During the previous 12 months, they earned 55 cents a share, off 68% year-over year. 2018 earnings were 92 cents a share, less than half of what they made in 2017.
It’s not hard to see that their business has been on the decline since the start of 2018, and it’s been a steady move down over this time. It’s not that things were that great before 2018 either. Ford’s stock has also declined since, down 28% from January 2018 levels.
Ford Hasn’t Been a Good Investment for Decades
People who invest aren’t particularly worried about year-over-year numbers and are focused on the long term, but even the long-term with Ford has been pretty ugly. We usually think of 30 years as a time frame that we can be very confident with when we hold stocks, but Ford has even failed on this time frame.
Ford traded at $10 back in 1987, and exactly 32 years later, it’s trading at $9.42. That’s not the sort of thing people expect or ever want from a long-term stock play, seeing your stock trade lower after all these years. We would have earned dividends, but we’ve also lost a lot to inflation, and in the end, this play would result in over 3 decades of holding and would have yielded a net loss.
There’s been some ups and downs since then to be sure, and there has been some times where Ford was a good or even a great trade, with the bounce off of the 2008-09 crash being a particularly good one. It went from $1.58 a share at the bottom to over $18 a share in less than two years. Although you’d never get something like this right at the bottom, there was still a lot of money to be made from playing this rebound.
This isn’t how investors do it though, as we would call this a position trade, and you have to be on the spot both with your entries and your exits with a strategy like this. Ford lost half of its value between 2011 and 2012, and then gained almost all of it back in 2013, but since then it’s been nothing but downhill ever since, and with stocks, downhill is the opposite direction of where you need to be going.
This has simply not been a stock that has lent itself to successful investing, and even in the face of the Moody’s downgrade, it still might be tradeable here on the long side, given that it has rebounded off of support and may be headed up another dollar per share to get back to where it was in July. That’s a potential for a 10% gain, and you could set your stop below $9 and have a better than 2:1 reward to risk potential, with it seemingly more likely to make a positive return than to drop below our stop.
This is not to say that this would be a trade worth taking, given all the other things that you could trade instead, but it’s at least a decent play perhaps, but not one even close to anything investors would ever be able to pull off due to the short-term duration of it.
If we’re actually going to invest in Ford, we can’t just look at its chart over the last few months, we need to look at one over the last few years. When we do, we get to see how this stock has trended straight down over the last 5 years, and that’s not a good sign.
If you woke up Christmas morning of 2018 to find some Ford stock in your stocking, and you kept it, you’d be pretty happy now because your stock would be worth 20% more today, so this might create the illusion that this stock has really heated up since then. Once again though, we can’t think such things if we are an investor, as we’re in it for longer than just 8 months and we aren’t going to want to or be able to time plays like this.
If It Isn’t a Buy, Then It Should Not Be a Hold Either
When people give their opinions of stocks, they usually are focused on the shorter-term, the next year or even the next quarter, and this is not a time frame that you want to be using by itself to enter investments. We need to look at the bigger picture too and the bigger picture matters even more to us. When it comes to figuring out when to sell positions, the short-term might be somewhat helpful, but if you are hoping to hold the stock for 5 or 10 more years or longer, where it is going next quarter or over the next year isn’t the most important thing to be sure.
It’s not easy to predict stock prices further out than this, but we can still get a sense of where a stock is headed, and this is where looking at both longer-term charts and longer-term business outlooks come in.
If both the charts and the business outlook are poor, this makes these decisions pretty easy, and it’s time to put your money elsewhere. It’s not clear why so many investors like to hang on to underperforming stocks, but when things turn below average for the things we measure, it makes no sense to do so.
Analysts rarely tell people to sell though, for whatever reason, so we have to interpret their hold recommendations as meaning that we should not be in the stocks, if they aren’t worth buying that is. If you would not buy it, you should never hold it either, a trader’s lesson that investors would be well served to heed as well.
Having Ford as a hold right now would also mean we should not be holding the stock for investment purposes, as it’s simply not a good investment right now by any measure provided that we actually do know what we are doing when we invest, meaning not hanging on to positions just because we are already in it. Positions need to be evaluated on their own merit, and with the nearly meaningless trading costs we have these days, if our stocks don’t measure up then we need to find something else that does.
Fitch and Standard and Poor’s still have Ford’s bonds a little above junk, but this should not provide much solace, as this just means that these two rating agencies don’t see Ford as close to their deathbed, but a stock doesn’t have to die to produce unacceptable returns.
Ford has been through a lot worse than this over the years, including surviving the Great Depression, so while there may be a day when they do go out of business, that’s really not much of a risk anytime soon. Just because someone is still able to get to their feet doesn’t mean we should be betting on them to win any races though, and Ford is certainly a laggard in this current marathon, staggering instead of running, with a little burst of speed lately but no real sign that they have any endurance to keep this going.
It’s not that they have all that much going for them this year anyway, as most stocks have put some real distance between where they were now and where they were on Christmastime, and there are a lot of them that look a whole lot better on any time frame than Ford does.
It is always about choosing the best place to keep our money, and when you can randomly pick another large cap stock and have a much better chance of success, even that would be preferable.
It’s hard to even imagine why anyone would want to hold this stock longer-term right now, as the future is far from bright and so much dimmer than so many other better choices. Ford’s bonds may or may not be junk, but their stock clearly is and will likely remain in the junkyard for some time. Until that changes, we need the willingness to try to separate the junk from the valuables, but realizing that this is our most important task is the biggest obstacle for many.
Editor, MarketReview.com
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