New Trade $F: Out of Favor But, But Not Out

by Dan December 20, 2013 11:40 am • Commentary

On Wednesday Ford lowered their outlook for 2014 citing greater than expected new product launch expenses, adverse affect from strong Euro and weakness in Latin America.  The stock had its worst one day drop in more than two years, of about 6.5%.

Prior to the warning, the stock had been lagging the broad market since making new two and half year highs in October as Ford CEO Allan Mulally, the gentleman largely credited for keeping the ship afloat and the companies turnaround after the financial crisis, emerged as a front runner to replace outgoing MSFT CEO Steve Ballmer.

It is my sense that a good bit of bad news is in the stock right now and I can not imagine that Alan Mulally would want to leave Ford on such a sour note.

With the street adjusting estimates in line with the company’s forward guidance, the stock now trades at about 10x that estimate, which is expected to decline, on sales that are expected to only grow year over year at about 2%.  Valuation is not a great argument to own the stock, but the lowered expectations and the possibility of CEO Mullay sticking around to go out on a high note at the end of 2014 could be.

Taking a quick look at the technical set up, the chart is fairly instructive to where the stock should hold in the near term and what should serve as technical resistance.

The year to date chart below shows $15 as slightly weak near term support, while $17, which also corresponds with the 50 day moving average, was prior support that could now serve as near term resistance.

Ford ytd chart from Bloomberg
Ford ytd chart from Bloomberg

On a longer term basis, the $15 level emerges as very important technical support level dating back to mid 2011, which if breached could put $13 in play.

Ford 5 yr chart from Bloomberg
Ford 5 yr chart from Bloomberg

It is our sense that barring news of Mulally leaving the company, or a further disappointment on sales and earnings, that there is a strong likelihood that the stock trades between $15 and $17 into the new year.

The company will report Dec car sales in early Jan, which should serve as the next catalyst, and Q4 earnings wont come until late Jan.  

The stock’s recent decline also corresponds with investor enthusiasm for shares of GM, which recently made new 52 week highs before trading off in sympathy with Ford.

We like the set up for a new year bounce in Ford with sentiment poor towards its peers and the broad market, that being said we think the likelihood of the stock making a new high above $18 in the very near future as relatively unlikely.

TRADE: Bought the F ($15.45) Feb 15/17/19 Call Butterfly for $0.58

– Bought 1 Feb 15 call for .91

– Sold 2 Feb 17 calls at .19 each (.38 total)

– Bought 1 Feb 19 call for .05

Break-evens on Feb expiration:

Profits: btwn 15.58 and 18.42 make up to 1.42 , with max gain of 1.42 at 17.

Losses: losses of up to 0.58 btwn 15 & 15.58 and btwn 18.42 & 19 with max loss of 0.58 below 15 or above 19.

Trade Rationale:

Ford stock has been left for dead, even though one big reason for its lowered profit outlook is that it’s actually one of the few companies that is willing to forgo current profits as it invests for the future. While the technical damage is significant, the idea of playing for some upside over the next 2 months with a structure that is limited risk is appealing at this juncture.