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.)
Jamie
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."
Analysts 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."
Larry
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."
