Macro headwinds, like higher interest rates, inflationary pressures, and general uncertainty, are at the top of every corporate executive's mind these days.
In the face of these challenges, Ford (NYSE: F) has some momentum on its side. The business posted 14% revenue growth year over year through the first nine months of 2023, building on the back of 2022's double-digit gain.
But before you rush to buy and hold this automotive stock, think again. History says that you'll regret this decision.
Not a good track record
You've likely heard the saying that past performance doesn't predict future results. While this is true, investors can look at historical trends for guidance. We can use this mental framework as we look at Ford from an investment perspective.
In the last 10 years, Ford has returned 7.7%, a figure that includes dividends. This means that had you invested $10,000 in the stock a decade ago, you'd be sitting on a balance of about $10,080. Obviously, that's a terrible performance.
"Rule number one: Never lose money. Rule number two: Never forget rule number one." These are famous words by the great Warren Buffett. If we factor in the rise of the Consumer Price Index, an investment in Ford would have violated this investment guideline, significantly losing your purchasing power.
On the other hand, if you simply put that $10,000 in an S&P 500 index fund, your portfolio would currently be worth $31,400, including dividends. That's more than a tripling of your initial outlay, a wonderful result.
Consequently, I think investors who are looking to buy Ford and hoping for a different outcome over the next decade should seriously temper their expectations. There are clear reasons to avoid this stock.
The company has unfavorable economic characteristics. The automotive industry is capital-intensive. Investing in research and development, building huge factories, and paying a unionized workforce are all incredibly expensive. And Ford's return on invested capital and operating margins are typically low, which doesn't make for a high-quality enterprise.
Why you might want to invest
The most notable incentive to buy Ford shares is the opportunity with electric vehicles (EVs). Ford Model e, where its EV operations are housed, posted unit and sales growth of 44% and 26%, respectively, in the third quarter of 2023. Some think this segment could drive better growth for Ford overall.
However, the Model e is expected to register an operating loss of $4.5 billion for all of 2023. And due to softer-than-expected demand trends, management has decided to postpone $12 billion in EV-related investments. That's not an encouraging sign.
What about Ford's valuation? Shares trade at a price-to-earnings ratio of 7.3 right now, which might prompt value-focused investors to take a closer look at the stock. That represents a 67% discount to the broader S&P 500. But as I noted above, this is a low-quality business, so the current valuation is warranted.
The dividend yield of 5.4% might entice income-seeking investors. But even this hefty payout hasn't done a good job of offsetting the decline in the stock price.
Despite what seem like positive characteristics, Ford still doesn't look like a smart investment for long-term investors. A look at the stock's history tells us this. And there's really no reason to believe this trend won't continue.
Should you invest $1,000 in Ford Motor Company right now?
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