Honda Motors ( HMC ) has failed to make much headway during the past two years. However, a recent victory by newly appointed Prime Minister Shinzo Abe helped pull the shares above $35 and could have paved the way for huge future gains.
Though the stock was trapped in a narrow trading range ($30 to $34) for much of last year, ChartWatch recently noted that Honda was set to break out .
The article listed three reasons to be bullish. First, the shares were cheap, trading at 9.5 times forward EPS. Second, HMC yielded 2.9%. Finally, the victory by Abe would cause the yen to fall, helping Japanese exporters.
Honda is still cheap. The stock has a forward P/E ratio of 10.8 times 2014 EPS expectations of $3.43.
Moreover, the dividend is still high despite the recent rally above $35. The shares yield 2.6% and management expects to increase the dividend by 15% in 2013.
Finally, Abe's victory has already resulted in yen depreciation. The currency has plummeted during the past month. This decline helped to boost valuations of Japan's exporters - like Honda - and it gave the shares the juice to surpass $35 resistance (blue arrows).
This chart shows the price ofHMCshares along with an important long-term support level to monitor.
I've been a long-time bull of Honda. Though the shares didn't climb by as much as I expected last year, they are in a great position to post huge gains this year.
More importantly, the downside for this investment is defined. As previously noted , the $28 level (blue line) has been an amazing line of defense during the past several years. A decline below $28 appears unlikely. So that's your maximum downside potential.
Honda is in a great position to move higher given the low valuation, generous dividend and Japanese political transition. Though $37.50 may be an area of near-term selling pressure, the shares should have no difficulty rising up to $48 within the next 12 months.
Equities mentioned in this article: HMC
Positions held in companies mentioned above: none
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.