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Buy American, But Not Ford and GM

Stocks in this article: FGMTSLA

According to Yahoo! Finance, the one-year price target on Ford is $14.75, as of Friday's close. Most analysts consider Ford a strong buy, a buy or a hold. The stock's price-to-earnings ratio now stands at a "cheap" 2.03. For many investors, this represents the value play of a lifetime. I've been hearing this for the last year. In 2011, I even went long some F call options. Over the last 365 days, F has lost about 32%.

The auto industry experts say the same types of things about GM. They scoff at the P/E ratio of 5.94. They come to consensus on a one-year price target of $33.07. And, over the last year, these expert analysts have cost investors a ton of money. GM is down approximately 35.5% over the period.

You would have done much better closing your eyes midway through 2011 and sending your money to a broad-market index fund.

Long plays over the last year in F and GM expose two common mistakes investors make.

One, they fall into value traps. When a value trap turns into a falling knife, it's easy not to notice. Your mind plays dirty tricks on you. The lower the stock goes, the bigger a value it becomes. Or so it appears in the mind of the person who called it a value at $15 or $30.

When it trades for $10 or $20, you would be a hypocrite if you did not consider the value play all the more attractive. Simply put, you want to be right, so you sell yourself on an ever better bargain than you spotted in the first place.

Second, investors often slip up when they buy sectors and do not focus on business models and target markets.

In a recent article, I discussed why Tesla Motors (TSLA) is the best buy in the so-called "auto industry":

"If you buy into the myth of diversification, you could spread yourself across the entire automotive sector. This approach, however, takes focus off of the Tesla narrative.
"... Tesla is not an automotive sector play. It's not an EV stock either.
"A bullish move on TSLA works out not because auto sales increase across the board or because EVs take off; it follows through because of the company's next-to-air-tight business model. It has high-end, exclusive luxury items available in relatively small supply. It generates pent-up demand among a customer base that does not have to ask how much something costs. And Tesla locates its showrooms in places where that target market lives and plays ...

Look at Ford's market. Look at GM's market. It's not only that European losses loom large, but, domestically, do you want to hitch an investment on companies that require the middle class to make large purchases?

No. You want to look at the consumer who buys each new Apple (AAPL) product as it's released.

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