A Healthy Alternative to GM

06/03/2009 10:22 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Elizabeth Harrow of Schaeffer’s Investment Research says Toyota Motor is likely to gain ground among the ashes of the once-great General Motors.

[In a recent article in BusinessWeek.com—author Gene Marcial] observes that the automobile industry has fallen on tough times during the past year, with former stalwarts such as Chrysler LLC and General Motors in bankruptcy. As a result of the weak fundamental environment, many analysts expect Toyota Motor (NYSE: TM) to underperform through fiscal 2010 (“Blowing the Horn for Toyota Motor,” May 26th).

However, says this optimistic article, long-term investors looking for bargains could do a lot worse than TM. The company is well-positioned to expand its footprint in emerging markets, such as China and India, creating future growth opportunities. Plus, the ascension of Akio Toyoda to the role of president this summer could restore the brand to glory; the incoming executive has already promised major reforms.

Additionally, argues the author, TM's tunnel-vision focus on research and development should continue to be a positive catalyst for future growth. Already, its next-generation Prius contributed to an up tick in US sales during May.

Investing in the auto sector right now is definitely not recommended for traders with weak stomachs. However, TM's performance on the charts this year is definitely worthy of recognition, especially considering the unsavory fates that have befallen its US counterparts.

[So far this year], TM has added [almost 24%]. The equity is currently enjoying the support of its ten-week moving average, which has acted as a backstop since late March. In fact, shares of the Prius parent [looked poised] to notch their second consecutive monthly close above former resistance at their ten-month moving average.

Even more compelling from a contrarian perspective, option players have adopted a skeptical bias towards the outperforming equity. TM's Schaeffer's put/call open interest ratio (SOIR) checks in at 1.96, with puts nearly doubling calls among short-term options. This SOIR is hovering within four percentage points of a 52-week high.

However, during the short term, traders should proceed with caution. TM is currently struggling to find footing above the round-number 80 region, which hasn't been toppled on a weekly closing basis since September 2008. Until this technical obstacle is tackled, the stock's upward momentum could slow. (The ADRs closed at around $81 Tuesday, after having closed last Friday just above $80—Editor.)

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