Don’t forget to enter my $25 Amazon Giveaway before Feb 6th, 2011!

Buying on a pullback is a great way to incorporate the investment gains of a day trader into your long-term trading strategy.  There are different types of pullbacks anywhere from a single down day into the market to a longer pullback such as a recession. If you are anything like me, you have a long list of companies that you believe in strongly and would like to own, but only at the right price.

My watchlist includes a vast number of companies (50+) with very compelling business models such as Google, ExxonMobil, Ford, Apple, and Amazon. Although I’ve not had time to do significant research into every company on my list, I do believe in their general business and have therefore added them to my “watch list”.

The watch list allows me to monitor the prices of these equities and watch for a pullback.  This week’s pullback?  Ford Motor Co. (NYSE:F) with a ~13.5% drop on Friday. Of course, you should not blindly buy on a pullback, but instead analyze whether there were any changes in the companies business model and if the investment still makes sense.

Girl with a truck

I'd pretty much do whatever this girl asked of me. If she says, "Buy Ford," I say, "How much?"

Ford Motor Co.:

Ford Motor Company posted full year earnings of $6.6B on Friday, however their 4th quarter earnings disappointed analyst expectations which caused the giant drop in the stock’s price. The disappointing earnings were due to a combination of slowing car sales growth in Europe and a number of one time charges.

Here is why I believe Ford still has plenty of room to grow, despite their most recent earnings disappointment.

  • 2010 earnings are clouded by a number of one time charges.  The full year earnings included a 0.25 cent charge for the discontinuation of Mercury and charges for debt reduction.
  • Ford’s highest margin brands are trucks, which are in high demand.  As the economy continues its recover, small businesses and contractors will need to start replacing older work vehicles and Ford leads in this market.
  • Ford’s sales jumped at double the rate of competitors in 2010.  Therefore as the auto market recovers to its full potential, Ford should end up with a larger slice of the overall pie.
  • In 2010 Ford reduced their debt from $33.6B to $14.5B saving over $1B per year starting 2011.  The debt is a significant concern so its great to see that Ford is making debt reduction a priority.

I look at this as a sale.  An opportunity to buy something you’ve always wanted at a significant discount.  Let’s take 2010 earnings of $1.61 per share, add $0.25 for the one time charges, and add another $0.25 for interest savings in 2011.  This would yield 2011 earnings of $2.11 assuming everything else remains constant (aka no growth in sales).  This would put Ford at a P/E of 7.7 which sounds like a sale to me.

Alternatives:

Keep a watch list and always be on the lookout for stocks that have significant pullbacks (without any change to their basic business model).  A couple examples from my list that saw significant drops this past week are Amazon and Apple.

Disclosure:

I don’t own any

Kevin’s Take:

Of all the American car companies, Ford is the one that made it through the recession without government assistance. They make a solid product and the numbers show their sales are increasing. I’m not a big fan of the UAW, but Ford has proven they can coexist with the labor union and still make billions in profits. I’m so excited about this pullback that I think I’m going to buy some in my Roth IRA on Tuesday. Here’s hoping there isn’t a big rebound on Monday.

Important to note that ALL ideas, thoughts, and/or forecasts expressed or implied herein are for informational and entertainment purposes only and should NOT be construed as a recommendation to invest, trade, or speculate in the markets.

Don’t forget to enter my $25 Amazon Giveaway before Feb 6th, 2011!