You asked, and I've responded. A number of readers have
expressed interest in getting a handle on my very best investment
ideas. So I figure the start of the New Year is a fine time to
I'm calling it by the simple moniker of "Dave Sterman's Top Plays"
right now, but stay tuned. This portfolio, which I'll publish for
free on the StreetAuthority website for a limited time, is just a
preview of what's to come.
The stocks I select, which will be bought with $100,000 of real
money to invest, courtesy of StreetAuthority, will play to a theme
that I've always sought out with my top investment recommendations.
It's what I like tocall "playing offense while playing defense."
Simply put, I love to find stocks that appear quite undervalued --
perhaps by 50% or more.
But I hate to lose money. Just hate it.
If you've ever lost big on a speculative high-flyer, then pay
attention. I pursue the distinct goals ofcapital appreciation
and capital preservation. Those may sound contradictory -- but
that's the only way to consistently make money in stocks. Three
steps forward and three steps back -- which is what happens when
you don't pay attention to the potential downside of a stock pick
-- is not what I am aiming for.
In a moment, I'll share with you my first pick in this new
portfolio, which will illustrate this "offense and defense"
First, a few housekeeping matters. Each week, I'll deliver a fresh
investment idea while providing updates on prior recommendations in
the portfolio. [
Go here to sign up for free
to ensure you get them delivered to your inbox as soon as
I aim to put that $100,000 to work in short order. That's because
I'mbullish on stocks and don't want to miss out on the rally I see
coming in the months and quarters ahead. I expect substantial
volatility, as themarket bursts to the upside over a period of
weeks or months, and then experiences another round of scary
sell-offs. I won't be shy about selling into rallies and loading up
in times of weakness. So there will be a degree of portfolio
turnover here, and it's crucial that you pay attention to those
So what's to come down the road? Stay tuned. I've got ambitious
plans to deliver a winning, insightful advisory, and I'll be
spending the next couple months working behind the scenes to get it
ready for you. For now, feel free to trade right along with me
(actually, you will be able to trade ahead of me, as I will always
give readers 48 hours notice before buying or selling any of the
stocks I recommend).
Without further ado, here is the first pick in my new model
The best company in a rebounding industry
Investors are often faced with a conundrum. Do you invest in the
best company in an industry, or the cheapest stock in that
In the case of
Ford Motor (
you don't have to choose.
The company is in the midst of a remarkableturnaround -- one that
still has legs.
And its stock is awfully cheap.
The real reason to own this stock now: it's very timely. All signs
are pointing to an even better year for automakers in 2012.
Recall that U.S. car and truck sales plunged from roughly 17
million vehicles in 2007 to less than 11 million vehicles by 2009.
(Ford and other car makers responded by slashing expenses and
proved their ability to make profits on a much smaller sales base.
I discussed Ford's impressive cost structure in
U.S. auto and truck sales perked up a bit -- to 11.6 million -- in
2010, and it looks as if they will have risen to 12.8 million in
2011. Most important, sales have been especially impressive in
recent months as car showrooms are now seeing more foot traffic as
the employment picture improves. Sales were robust in October and
November, and apparently will finish the year on a high note as
well. That's why auto-industry rating firm J.D. Power &
Associates sees sales hitting 13.6 million units in 2012. Some
industry watchers, such as Morgan Stanley, now project 14 million
In Ford's case, the company sold 2.3 million vehicles in North
America in 2007, just 1.6 million vehicles by 2009, but a healthier
2.1 million vehicles in 2011. I expect that figure to hit 2.3
million in 2012 and perhaps 2.6 million by the middle of the
, Ford's cars and trucks are now as reliable as the top brands from
Meanwhile, Ford's stock remains utterly unloved.Shares have
fallen from roughly $19 early in 2011 to a recent $10.75. In fact,
they've been stuck in the $10 to $12 range since early August --
even though the industry has built a head of steam since then. Part
of the blame for the weak stock performance goes to Wall Street.
The analysts who follow the company are simply moving too slowly to
anticipate what Ford's results will look like in the quarters and
years to come. They missed the boat in 2008 and early 2009,
whenshares of Ford moved up sharply from the sub-$2 level, and
they're missing it again...
These analysts see Ford's profits actually falling roughly 15% to
$1.60 a share in 2012.
They're flat wrong. I've done the math.
Assuming Ford simply maintains currentmarket share and industry
sales hit 13.5 million, Ford will earn $2 a share -- or more.
That's not exactly a stretch. Ford has earned $1.73 in the past
nine months alone. In the fourth quarter of 2011, analysts
expectearnings per share (
) of just $0.26.
How do you square that dim view with this recent comment from
Citigroup about December sales? "Our checks suggest that, like
November, Ford may stand out again on healthy retailmarket share
and industry outperformance on both pricing and incentive
Ford is on the cusp of launching a pair of major new products, the
Escape crossover and a new Fusion sedan, which should help
cementmarket share gains. Ford held 14.2% of the North American
automarket in 2008. That figure rose to 15.3% in 2009, and then
16.5% in 2010, where it's since held.
Of course, we're talking about 2012 and beyond as the driver for
this stock. Not only do I think Ford will earn in excess of $2 a
share in 2012, which is more than 25% ahead of the current
consensus, I also believe Ford will be anearnings powerhouse by the
middle of this decade. Once investors realize Ford is holding up
well now, they'll start to think about what the automaker can earn
when industry sales hit 15 million vehicles.
By my calculations, that industry size works out to
potentialearnings power of $3 a share. And we're talking about an
Of course, Ford needs to deal with troubles in Europe, where the
company gets 25% of its sales. Industrywide, European auto sales
are expected to fall roughly 4% in 2012 to around 13 million, which
would be the fifth straight annual decline. Economists expect
Europe to slip intorecession this year, but then to start growing
again in 2013.
Europe may not be a great source of profits for Ford in 2012, but
neither will the region lose Ford money as management is in the
midst of a series of cost-cutting steps. Look for Ford to make
money in Europe in 2013, and plenty more profits in 2014.
The downside protection -->
Shares of Ford have firm support in the $10 to $11 range, trading
at less than six times likely 2011 profits.
Even in the recent tough years, Ford has been generating more than
$12 billion in operatingcash flow each year. More important, Ford
now has more cash than debt for the first time since 1974.
The company hopes to build a $20 billion ($5 a share) cashwar-chest
by the end of 2012, which will be able it to support future
buybacks anddividend hikes.
The upside triggers -->
Ispot three catalysts ahead.
First, I'm looking for a better-than-expected December quarter, the
results of which will be announced in late January.
Second, I expect the clouds that loom over Europe to be resolved in
the coming months. Concerns that Europe will drag Ford down should
evaporate at that point.
Third, I expect Wall Street to respond to the beginnings of a
rebound in Ford's stock by publishing increasinglybullish reports,
which should boost the share price. All signs point to steady or
, which will be a key theme for analysts in 2012. This stock only
works when the chorus of analysts sings its praises.
Action to Take -->
While I will seek to seize quick gains with other ideas in my
$100,000 real-money portfolio, Ford'sshares have such a long runway
that this will be a stock tobuy and hold for an extended period.
In light of my deep conviction in this stock, I am
allotting an inordinately large portion of the portfolio to this
pick -- 1,160
, worth roughly $12,500 -- which I will buy on Wednesday, Jan.
Remember, I'll always give you at least 48 hours notice before I
make a trade, so you'll have ample time to buy before I do. Who
knows? You may even get a better price.
-- David Sterman
P.S. -- As I stated earlier, this is the first of what will be a
regular feature on StreetAuthority.com -- but it will only be
available for free for a limited time. And since I've got $100,000
in cash to invest, you can be sure I'll be on the lookout for the
absolute best ideas for major upside, while still looking to limit
downside as much as possible -- just as I always have.
To ensure you get updates on my $100,000 portfolio as soon as
possible -- in addition to anything else I write for
StreetAuthority -- I urge you to go here to sign up for my
latest picks. You'll get them delivered to your inbox as soon as
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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