Ford Stock: Know When To Hold And When To Fold (NYSE:F)

What happened?

Ford Motor Company (NYSE:F) announced in after hours on Sept. 19 that it was having issues with its supply chain and inflation. Ford warned third quarter earnings would be affected by about $1 billion in higher-than-anticipated supplier costs and parts shortages that have led to unfinished vehicles it couldn’t sell during the period. Even so, the auto maker reaffirmed its year-end guidance for 2022, projecting adjusted operating results for the third quarter would fall between $1.4 billion and $1.7 billion.

Major supply chain issues

Ford’s stock was down nearly 5% in after-hours trading on the news. Ford said it expects to have about 40,000 to 45,000 vehicles in inventory at the end of the quarter that are awaiting parts and can’t be delivered to dealerships, a figure that’s higher than expected. Those vehicles, many of them higher-margin trucks and SUVs, are expected to be completed and sold in the fourth quarter, the company said.

Inflationary costs hit margins

Additionally, based on recent negotiations with suppliers, Ford said it’s paying more for parts and materials to account for the effects of inflation. The higher payments added about $1 billion in unexpected costs in the third quarter, the company said. Ford said in July it was facing inflationary pressures that would affect a range of costs, totaling about $3 billion for the year.

Ford has previously guided to adjusted earnings before interest and taxes of between $11.5 billion and $12.5 billion for full-year 2022. The company’s notice is another indication that the supply-chain disruptions that have hindered the industry for more than a year now are continuing to weigh on auto-sector earnings. On the guidance front, notably, Ford stuck to its full-year guidance due to continued pricing power of its most popular models.

Pricing power for popular models holds up – so far

Inflationary pressures have pushed up raw-material costs, and Ford has raised sticker prices on some popular models, such as the electric Mustang Mach-E SUV and F-150 Lightning truck. Ford’s earnings have been helped by buyers willing to pay record prices for new vehicles because of limited car and truck availability. In the second quarter, the auto maker’s net income rose nearly 19% over the same-year period. Nevertheless, shares subsequently sold off hard on the news.

Ford Current Chart

What’s the latest chatter from the analyst community?

What are analysts saying?

Doing some quick math, Morgan Stanley analyst Adam Jonas noted that by assuming average selling prices in the $50K range and a 30% decremental, the development could account for approximately $600M of EBIT impact from the vehicles on wheels, to which can be added the higher than expected inflation/supply costs.

Meanwhile, Evercore ISI thinks the vehicles in transit will be seen as transitory, but warned surprise inflation is always worrying. Analyst Chris McNally thinks investors will now likely assume the very low end of Ford’s full year adjusted EBIT guide of $11.5B to $12.5B is somewhat in jeopardy given implied $3.9B of fourth quarter EBIT at the low end. Ford is seen at risk of near-term underperformance.

What did we do?

As many of you know, I have been a big proponent of Ford as of late. Nevertheless, there always are downside risks to every investment as I stated in the last piece.

Potential Downside Risks

The following is a list of downside risks as I see them.

• Inflation continuing to rise causing costs to increase.
• A hard landing causing a deep recession.
• A decline in Ford’s market share.
• Lower-than-anticipated market acceptance of Ford’s new or existing products.
• Further supply chain issues.
• China’s economy not coming back online.
• Fluctuations in foreign currency exchange rates, commodity prices, and interest rates.
• Ford recalls.
• Ford legal issues.

The bottom line is that no matter when you decide to buy a stock, there will always be a “wall of worry” to climb. The question is what risk management techniques do you employ to help you sleep well at night. I’m going to detail the technique I employed to protect my gain in this particular position.

The Bigger they are the harder they fall

When one of my holdings in my growth portfolio has such a massive gain in short order, I’m always sure to set up a risk management exit strategy to protect my gains. When a stock runs up so quickly, the gains aren’t as stable based on my experience. Much of the gains could be attributed to algorithmic computerized traders who tend to have much shorter holding periods. Let me explain in detail how I handled this particular position.

Set up an exit strategy

In a situation such as this where I had a substantial 31% gain in Ford, I will set up an exit strategy for the position to ensure I don’t give it all back. With a recession looming amongst many other potential downside risks, I had decided to set up an exit strategy for this particular situation that helps me sleep well at night. I had a Stop Limit Sell Order in at $14 to assure a 20% gain on the position. I bought Ford for the Winter Warrior Investor Service growth stock portfolio on July 13th for $11.48.

Original Ford Buy Thesis

“The primary drivers of Ford’s growth will be the Ford+ program, and the success of their foray into the EV space. On top of all this, the company has decided to reorganize into three distinct segments: Model E; Ford Blue; and Ford Pro.

I see this as a huge positive for the stock and company. By splitting the company into three distinct segments, the clarity of purpose and focus for each of the teams should increase drastically. The distinct mission focus of each group should drive a much quicker clock speed, allowing Ford to make decisions much faster and creating a more efficient design and cost structure.

Ford Credit is showing no signs of weakness at present, either. I believe the stock will soon fulfill the Golden Cross and continue much higher as reports of the company’s successes stack up. My 12 month price target is $20, implying 30% upside from current levels.”

Now, don’t get me wrong, I still believe in Ford for the long run, but in this particular instance I felt the stock had run too far too fast and with the announcement of bad news coming in after hours, I saw the stop order being executed the next day so I went ahead and sold out in after hours on the 19th just after the announcement for $14.22 and sent out a SELL alert to service members.

One thing I hate more than anything is watching a huge gain evaporate before my very eyes, especially if I knew in my bones it was going to happen. By setting up the stop limit order and having my alerts set for news on my positions I was able to protect those gains on the Ford position.

By selling out at $14.22 the service and its members locked in a 24% gain rather than watching it shrink to 0% over the past week. Now we essentially have a 24% cushion on the position if and when we decide to reenter at some point in the future. I still have faith in the company for the long-run as I stated previously. Now let me wrap this up with a conclusion for those who are current shareholders and prospective buyers.

The Wrap Up

Like I have stated several times, I’m still a believer in Ford for the long term. So if you have continued to hold during the recent selloff, now is definitely not the time to sell. You may be in for more downside due to idiosyncratic and macro issues over the next few quarters, yet I see Ford coming out on top in 2023. You already have endured a majority of the pain; I would definitely hold. I’m waiting till at least after third quarter earnings results are announced to gain a better perspective on where Ford really stands at present.

What’s more, if you’re a prospective buyer, I would wait for a sign that the selling has ended and some sort of trend reversal is underway. There is wisdom in the old saying “Never catch a falling knife.”

Furthermore, there’s a fine art to investing during highly volatile markets such as these. It entails layering into new positions over time to reduce risk. You will want to have plenty of dry powder if the stock you’re interested in continues lower. As a Veteran Winter Warrior of the U.S. Army’s 10th Mountain Division, the attributes of patience and perseverance were instilled in me, hence my investing motto “patience equals profits.” Here’s a picture of me performing the Australian repel while at Ft. Ethan Allen Mountain Warfare training in Vermont.

So, always layer in or “dollar-cost average” when building a new position and use articles such as these as starting points for your own due diligence. Those are my thoughts on the matter – I look forward to reading yours! The true value of my articles is provided by the prescient comments from the well-informed Seeking Alpha members in the comment section. Do you believe Ford is a Buy, Hold or Sell at present? Why or why not?