Don't Hitch Your Wagon to Ford

05/03/2011 3:02 pm EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

The stock failed to respond to strong earnings, and the preponderance of outstanding bullish calls signals more trouble as options expiration nears, writes Andrea Kramer of Schaeffer’s Investment Research.

Despite reporting stronger-than-expected first-quarter earnings, "there are some potentially troublesome issues in North America" that could impact Ford Motor's (F) future figures, warned a recent Fortune article. (“Ford: Look Out for Potholes,” April 26).

To start, while the Detroit diva's latest report highlighted increased margins, "the full impact of higher gasoline prices wasn't felt in the first quarter." What's more, the company's domestic market share fell to 16% in the first three months of the year, regardless of the well-received debut of products like the compact Focus and Explorer crossover models.

Meanwhile, "Ford's well-earned reputation for quality is about to take a hit," cautioned the columnist, referring to the automaker's MyFord Touch system. The hands-free, voice-activated technology was the subject of a scathing assessment from Consumer Reports, which said novice users "might find it difficult to comprehend."

Finally, Ford's Lincoln brand "remains a headache," says the author, despite the company's promises to fix the low-selling, profit-denting line of vehicles.

Contrarian Takeaway
After gapping higher on the heels of its celebrated earnings report, F has since surrendered its post-earnings gains. Smacking the stock lower was its 20-week moving average, which—along with its ten-week cohort—has contained all but one of Ford's weekly finishes since mid-January.

Plus, the overhead May 16 and 17 strikes are home to more than 65,000 calls combined, which could act as an added options-related headwind as expiration draws near.

Underperformance is nothing new for the stock, which has lagged the S&P 500 by some seven percentage points during a recent window of 60 trading sessions.

Nevertheless, the brokerage bunch remains devoted, with Zacks reporting seven "strong buys" and one "buy" recommendation, compared to seven lukewarm "holds" and not a single "sell."

Meanwhile, the consensus 12-month price target rests at $19.50, Thomson Reuters reports—implying expected upside of 26% to Monday’s closing share price of $15.45, and in territory not charted by the shares in nearly ten years.

Should Ford extend its pattern of lackluster price action—or should the aforementioned fundamental concerns come to fruition—the abundance of optimism among analysts could translate into a contrarian liability for the stock. A barrage of downgrades and/or price-target reductions could spark added selling pressure.

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