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November 05, 2012 at 11:07 AM EST
Why the Huge Move Upward in Ford and GM Isn’t Temporary

Why the Huge Move Upward in Ford and GM Isn’t TemporaryWhen it comes to long-term investing, it’s important to have a solid investment strategy that looks past the short-term fluctuations and focuses on the horizon. While many have been quite negative on the U.S. economy—and for good reason over the short term—this means many people have missed a good investment strategy involving the accumulation of the domestic carmakers before the latest move upward in their stock prices.

The recent results from the two American car-making giants show that the domestic market is actually quite strong. Ford Motor Company (NYSE/F) announced quarterly earnings that beat analyst estimates. The stock not only rose 8.2% that day, but it has continued to move upward. With 19 analysts estimating $0.30-per-share earnings, Ford came in at $0.40 per share, excluding one-time items. (Source: “Ford Advances After Outpacing Profit Estimates,” Bloomberg, October 31, 2012.)

The investment strategy for Ford has been to move away from the European division and move into markets in which the company is quite strong. The company expects to lose $1.5 billion in Europe this year and next. The long-term investing strategy for the company is to continue eliminating jobs in Europe and reducing that division, as weakness is expected on that continent for an extended period of time. This is certainly a prudent investment strategy for the company, as the American, South American, and Asian markets are far more attractive than Europe over the next decade.

f stock market quotes Chart courtesy of www.StockCharts.com

As is quite evident from the chart, those interested in Ford for long-term investing had plenty of opportunity to enter the stock before its recent breakout. Even following the breakout, the stock only trades at a forward price-to-earnings ratio of 7.8. (Source: Yahoo! Finance, last accessed November 2, 2012.) More importantly, the vehicles that the company is making are quite strong in the marketplace. I looked at the lineup, and I really like the way the company has changed over the last four years. I believe the management team in place is quite capable of competing over the next decade, and the opportunities look to be quite attractive for Ford.

Fellow competitor General Motors Company (NYSE/GM) also had a solid earnings report. The biggest news from General Motors (GM) is that its investment strategy is to make dramatic cuts to its European division, much like Ford. This is a solid investment strategy for both companies. GM is planning to make $200.0 million in cuts this year, followed with $500.0 million cuts annually, beginning next year. Long-term investing is about anticipating where the markets will be, and it is quite apparent to many that future growth is not in Europe. (Source: “GM Jumps Most Ever Promising to Stanch Losses in Europe,” Bloomberg, November 1, 2012.)

With the release of its good earnings report, GM’s stock increased 9.5% that day. The U.S. government is still a large holder of GM shares, which it has pledged to sell fairly soon. This would be quite a bullish event, because this will allow the company to possibly start buying back shares, as its cash pile is starting to grow substantially. Long-term investing is about proper allocation of capital and market penetration. It appears both firms are making the hard decisions now in their investment strategy to benefit down the road, over the next decade.

gm stock market quotes

Chart courtesy of www.StockCharts.com

GM has bounced off its 200-day moving average (MA) a couple of times, which was an attractive entry point as an investment strategy for the stock. Obviously, both stocks are good considerations for those interested in long-term investing. However, these are not companies that will be growing revenue at a massive rate. The proper investment strategy for both companies is to wait patiently for opportune entry points. Considering both carmakers are now producing strong products, as well as smart cost-cutting measures, I’m sure many investors will be considering adding to positions on pullbacks over the next few years.

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