We are getting to that time of year when it might make sense to keep your eye on some of the worst performing large cap stocks, particularly those in the Dow Jones Industrial Average. Get your list together to play the “Dogs of the Dow”. There were few stocks in the Dow that had as much consistently bad news as General Motors (GM) did in 2014. The stock’s 23% year to date decline reflects this negative sentiment, but if I were management I would look to get all the bad news out of the way in the current year. While this year has been marred by recall after recall, with an expected earnings decline of 17% and flat sales, analysts currently expect a significant earnings rebound in 2015 after all the charges and a 3% sales increase. The current dividend yield is 3.83% and the stock trades less than 8x next year’s expected earnings. Let’s be clear, this is not my cup of tea, but the stock is trying its best to put in a bottom just above $30:
As we have more than six weeks left in the year it is probably a tad to early to try to pick a bottom in one of the worst losers in the Dow Jones, but GM is tops of the list. The technical set up remains precarious as another break below $30 could establish that level as new resistance.
If I were inclined to play for a bounce I would look to define my risk, as options prices remain reasonable, despite what has felt like a never ending series of lower highs and lower lows from the 52 week highs:
In the meantime though, there is clearly less hair on Ford (F), and a Twitter question got me too take another quick look at both:
@RiskReversal Autos looking good today, finally. Good risk/reward in $F and $GM IMO.
— Jared (@JDR1024) November 11, 2014
So if you asked me how I would play the autos into year end? I would be patient with GM, as I would expect more bad news to come out, but Ford, down 20% from the 52 week highs in July, and down 6% on the year looks like it could be poised to make a move back to its late September breakdown level at $16 which also corresponds with the stock’s 200 day moving average:
If I were to play for a bounce in Ford in the coming weeks I would merely buy the Dec 15 Calls for .16, with a breakeven at $15.16. up about 5% from the current price of $14.42. While it is generally a losing strategy to buy out of the money premium to predict price movements, these calls at about 1% of the underlying stock price seem dollar cheap.