Shocking Investment Idea No One’s Talking About—Yet
By Sasha Cekerevac for Investment Contrarians |
One of the most important factors to consider and one of the most difficult to comprehend when it comes to the market is investor sentiment. Investor sentiment is usually far ahead of both the general public and the economic data.
A perfect example is how investor sentiment in the housing sector was clearly far ahead of the recent data showing strength for the homebuilder stocks and new home construction.
One stock that has performed quite well lately is Ford Motor Company (NYSE/F). Many times last year, when much of the public was negative on the economy and housing, Ford came out with extremely strong results. Of course, this is partially due to their pickup truck division, which is directly correlated with the boom in new home construction.
For the fourth quarter of 2012, Ford reported the highest pretax profit in over a decade, with $1.7 billion, a huge jump of $577 million from the fourth quarter of 2011. For the full year, Ford reported a pretax profit of $8.0 billion, and the firm ended 2012 with a gross cash level of $24.3 billion. (Source: “Ford Posts Highest Fourth Quarter Pre-Tax Profit in More Than a Decade,” Ford Motor Company web site, January 29, 2013, last accessed February 4, 2013.)
However, a big problem for Ford, along with many other automotive stocks, has been the eurozone. Ford’s revenues in the eurozone dropped from $33.8 billion for the full year 2011 to $26.6 billion in 2012. The company is making strategic revisions to its eurozone division.
We all know the eurozone has been in trouble for quite a long time. Recent data may be indicating that the bottom is close.
Just as investor sentiment shifted far ahead of the economic data regarding the housing resurgence in America, recent data by market research firm sentix (which conducts a weekly survey of approximately 4,000 registered investors, 900 of which are large institutions) shows an improvement in eurozone investor sentiment.
The sentix Economic Index has now risen for the sixth month in a row. While it is still below zero, it has drastically improved over the past six months. The current reading for February 2013 is -3.9, compared to -7 in January, -16.8 in December, and -23.2 in September. (Source: “sentix Eco Report: Indicators for the Global Economy,” sentix, January 7, 2013, last accessed February 4, 2013.)
Interestingly, expectations by surveyed investors looking out six months are now at the highest reading since June 2007. This section of the eurozone economic expectations index was at -10.8 in September 2012, but it has risen every month since, including the current reading for February of 15.8.
Frankly, considering the situation in Europe, I was surprised to see investor sentiment moving up so sharply. However, one can’t argue that, clearly, investor sentiment is expecting economic conditions to improve for the remainder of 2013.
The report’s findings regarding the eurozone will be a shock to many investors, as it states, “Overall, we can note: with a composite index close to the zero mark, the euro zone economy is poised to grow again. It is almost without doubt that the composite index for the euro area will reach positive territory soon—the general dynamics are currently just too strong.” (Source: Ibid.)
If investor sentiment is becoming bullish, even though companies such as Ford are currently suffering in the eurozone, perhaps we might be near the bottom of this economic trough. If that were the case, considering Ford is outperforming in North America as well as Asia, and since many investors have written off its eurozone division completely, any slight marginal improvements within the eurozone would have a huge positive effect on the company.
This is difficult for the average retail investor to understand; one can’t invest on current information, but on the anticipation of what will occur in the future. If investor sentiment has completely written off the eurozone portion of Ford’s business, this means a positive surprise would be extremely bullish.
Even at current valuations with the eurozone a weak part of Ford’s business, the company trades at extremely reasonable valuations. Clearly, housing will continue to rebound for the remainder of the year along with automobile sales, considering the Federal Reserve will keep interest rates extremely low. Unless one believes interest rates are going up anytime soon, the housing and automobile sectors will continue to be benefactors.
Chart courtesy of www.StockCharts.com
Ford’s stock trades at a forward price-to-earnings (P/E) ratio of approximately 7.6 and has a forward dividend yield of 3.1%. Investor sentiment has become quite bullish on this stock over the past few months, as seen by the chart; but this, again, is without any improvement in the eurozone.
If business improves in the eurozone in the second half of 2013, in addition to the already strong North American and Asian divisions, we could see significant upside potential for the stock.
Frankly, I’ve been quite bearish on the eurozone in general over the past few years, considering the lack of any real structural reforms that have been enacted. However, one can’t be dogmatic and stick to one’s own opinion without being able to shift with investor sentiment. If the data show positive surprises, one must take note.
Obviously, very few people in North America can fully understand the complexity of the eurozone problem. However, seeing investor sentiment improving significantly within the eurozone every month—this can’t simply be ignored as a one-time event.
As investor sentiment in the housing sector was clearly ahead of economic data, perhaps investor sentiment for the eurozone is also ahead of the curve. Only time will tell, but even in the worst-case situation, Ford is still trading at attractive levels, even with a weak eurozone business segment. The stock will most likely consolidate its significant gains for the year, but I would anticipate buyers stepping in to accumulate on large pullbacks.