Auto Gains

12/19/2003 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

Schaeffer's Investment Research, whose analysts are noted for their contrarian investing strategies, is bullish on auto stocks, in large part due to widespread pessimism towards the sector. The Rational Investor focuses on long-term fundamental value and is also attracted to the out-of-favor auto sector.

"Daimler Chrysler (DCX NYSE) is on pace to reach our target of $80 per share within the next three years," says Jamie Dlugosch, editor ofThe Rational Investor. "The stock trades for just 11 times 2004 earnings estimates of $3.38 per share, which would be a 57% improvement on 2003 earnings. There are fewer and fewer places to find such impressive growth prospects still trading for attractive valuations. The US auto industry has been widely criticized of late and earnings expectations have been lowered. Nonetheless, we think of DCX as a global brand and the Mercedes name alone represents intangible value of immeasurable worth. Like Daimler, Ford (F NYSE) trades for a low valuation. Clearly, the troubles at Ford are much deeper than those faced by DCX. S&P recently downgraded the company's debt, but kept a stable outlook. Such a downgrade is typical for a company that is in the midst of a restructuring. We think Ford is a great buy-and-hold investment as the company continues its recovery. We maintain our target of $30 over the next few years."

"We continue to see pessimism on autos," says Schaeffer's Daily Contrarian, a column that reviews various media and news outlets to provide insights on contrarian investing. "A Goldman Sachs auto analyst recently sent a research note on Ford Motor (F NYSE), noting that its stock price was not being supported by the company's financials. Additionally, it notes that the stock is 'quite expensive given the limited evidence, in our view, of a turnaround in the company's performance.' Our contrarian takeaway from this report is that one of the reasons for our bullish posture on Ford and other autos has been the high levels of pessimism on the industry. First, there was a cover story in The Economist entitled, 'Extinction of Car Giant' back in June. Recently, there has been a book published entitled, 'The End of Detroit'. Finally, while the auto sector has been moving higher, investors have been skeptical. With the sentiment still steadfastly bearish, Ford may have further room to drive higher." Schaeffer Investment Research analyst Joe Sunderman adds, "We continue to believe in Ford, the beleaguered automaker. Skeptics are still plentiful. We are holding for a monster move to 18.20, with a stop loss at 13.20."

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