Waiting to Get Out of Neutral

11/25/2008 12:00 pm EST


Mark Fightmaster

Financial Analyst, Schaeffer's Investment Research, Inc.

Mark Fightmaster of Schaeffer’s Investment Research takes a contrarian position to a recent article about a major auto manufacturer.

Recently, Barron's declared its bullish love for Honda Motor (NYSE: HMC) [in the November 17th article “Honda Is Geared Up For Better Days”].

It seems that part of the reason for the bullish coverage is a car called the Clarity, which is powered by a hydrogen fuel cell and gets roughly 74 miles per gallon. The Clarity also emits water vapor rather than pollutants through its exhaust pipe.

However, [the author Jay Palmer] uses the Clarity as an example of Honda's  technology leadership as the Clarity won't hit the street for mass consumption for a while, and it needs a "nationwide network of hydrogen-fueling stations" that could take "at least a decade" to get up and running. In fact, the article suggests that "despite the global car market's current misery, any investor with a long-term view should consider its [HMC] stock whenever signs start to emerge of an upturn in the auto industry."

The article does note that Honda was one of two car manufacturers to have positive sales in the first nine months of the year. That said, Honda has seen its sales drop—most notably a 25% fall during October. Honda also predicted that its 2008 sales would be 2.4% lower for the year, the first yearly drop in 15 years.

The article starts to make my point when it states that J.D. Powers has warned that the global auto industry is headed for "outright collapse in 2009…with a recovery at least 18 months away." This warning hints that it will be a while before anyone should be bullish toward any automotive company, Honda included. Nevertheless, the article positions itself bullishly toward Honda's prospects once the "down draft ends."

Sentiment certainly suggests a chance for upside, as Honda's Schaeffer's put/call open interest ratio (SOIR) of 1.00 is a percentage point away from a 52-week high. An unwinding of this bearish sentiment could be just the catalyst the stock needs.

In addition, half of the four analysts following Honda rate it a Hold, which could be bullish on two fronts. First, these holdouts could issue upgrades. Second, a lack of analyst coverage suggests the chance for positive initiations, which could act as an upside driver. The stock has dropped 35% since the beginning of the year, so it will need to find some measure of support to cling to in order to weather the current down trend.

Is a turnaround for Honda possible? Yes, but a bullish position on Honda will require patience. (Its ADRs closed above $21 Monday, not far from their 52-week lows—Editor.)

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