Auto "Options"

03/12/2004 12:00 am EST

Focus:

Auto stocks may be out of favor, but several leading advisors are taking a contrary stance. Jamie Dlugosch suggests buying both Ford and Goodyear, while options advisor Bernie Schaeffer likes the car maker, and Larry McMillan offers an options strategy on the tire company.

(For more information on the advisors cited below, please click on their photos.)

Dlugosch, JamesJamie Dlugosch, editor of The Rational Investor, notes, "Ford Motor (F NYSE) finished the year ahead of expectations, earning $1.13 versus the estimate of $1.06. With that in mind, analysts have been raising estimates for the future and now expect F to earn $1.28 in 2004 and $1.53 in 2005. From our perspective, such numbers indicate that F is trading for a multiple below 10, while those same earnings are growing in the high teens. The Ford would only need to earn $2 per share and trade for a 15 multiple to reach our goal of $30. It may take a few years to get there, but it will be well worth the wait. Buy up to $15. Meanwhile, the turnaround at Goodyear Tire and Rubber (GT NYSE) is now under way. The firm is on track to break even in 2004 after suffering through significant losses in recent years. That being said, the recovery does seem longer than expected, analysts have been lowering expectations, and buyers clearly remain reluctant. Concern is certainly merited, but the positives far outweigh the negatives when looking at GT. As the leading player in an industry vital to the entire world economy, we think GT is worth the risk at these levels. Our target is $15. Buy on pullbacks below $7.50."

Schaeffer, BernieAnalysts at Schaeffer's Investment Research remain bullish on Ford. Says Beth Gaston, "The shares stepped lower on news of a recall, but remain in a solid long-term uptrend that began about a year ago. There is plenty of upside potential for the stock, as it remains well below potential resistance at the 21.88 mark. This level defines a 50% retracement point from the security's April 1999 high and its March 2003 low. In sentiment news, put open interest among near-term options easily outweighs total call open interest. This reading is higher than 96% of all of the year's past readings. And, there are about 78 million F shares sold short, which equals a fairly hefty short-interest ratio of almost six days to cover." Adds Nick Perry, "It is easy to see the disdain for Ford. Short interest is increasing and relatively high. Additionally, over the past few months, Ford and the entire auto sector have received a good deal of pessimism in the media. Wall Street still has no respect for the shares despite the stock handily besting the return of the S&P 500 Index over the past six months. Taken as a whole, I would say the numbers above offer a very encouraging sentiment backdrop. All-in-all, it appears that the uptrend is still intact and pessimism is still running high."

McMillan, LawrenceLarry McMillan, editor of The Option Strategist,  offers a very sophisticated approach to  Goodyear Tire & Rubber, which should only be followed by those who understand the complexities of covered option writing. The advisor explains, "This recommended covered write is a rather risky one. The SEC has formalized a probe into Goodyear's European accounting operations-a probe initiated last year. Also, a debt downgrade by Standard & Poor's is a possibility- although it was forestalled by a private sale of notes, the proceeds of which are destined for debt repayment. If you think these problems are material, then you should not take this recommendation. However, these problems have inflated option premiums, so if you feel that the company will weather this storm, the returns from this write are large. For those, we suggest this strategy: Buy 500 shares of Goodyear and sell 5 July 7.5 calls (GTGU) for a net debit of 6.40 or less. The expected return is very large here (26% cash, 54% margin), but that's because the computers don't include the fundamental information we are considering."

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