NEW YORK (TheStreet) -- If you are long Ford (F), like me, you want to know why Jim Cramer and Stephanie Link, managers of the Action Alerts PLUS portfolio, sold their position in Ford earlier this week.
Some investors are likely scratching their heads, as it seemed obvious that Cramer was a big advocate of Ford.
While there are still many positives going for the automaker, there are certainly some headwinds that investors should be aware of, headwinds that Cramer may no longer wanted to be a part of.
Cramer and Link's reasoning was two-fold, as explained to more than 40,000 subscribers of AAP Monday morning:
This has paid off handsomely for subscribers. Ford is only up 1.3% on the week and Macy's is up 9.6% after making new 52-week highs following a strong earnings report. On top of those returns, as noted above, they helped subscribers take home a 10% return in Ford, combining with M for roughly 20% in profits.
Namely, after you receive this Alert, we'll sell out of our 6,700-share Ford position at $16.90, and initiate a 1,000-share position in a new consumer name, Macy's (M), at $46.50.We initially wanted just to pare back the Ford position -- but now, given speculation that current CEO Alan Mulally might leave to join Microsoft (MSFT), we don't believe the shares offer a great risk-reward scenario. Plus, we're up 10% in the position, and we'll lock in our gains. Turning to the Macy's initiation, the risk-reward ratio here is attractive at these levels: The stock has underperformed the S&P 500 by 9% since its fiscal second quarter (ended April), and expectations are currently very low. Overall, the fourth-quarter setup is compelling given low expectations, a healthier consumer -- oil prices are down 15% since Aug. 28 -- and strong management execution. Macy's has one of the best management teams in the industry, and we expect they will continue to focus on strong product assortment, a lean expense structure and shareholder returns. Management has done a great job at harmonizing its inventory, merchandising and buying infrastructure, and it has built out a successful distribution and fulfillment platform.
Not too shabby. But does the sale mean the duo no longer cares for Ford, or are they simply avoiding the headline risk over speculation that Mulally will step down as Ford's chief exec? To gain insight, let's do a rundown of what's going right at Ford as well as the potential setbacks. Positive Catalysts
In its most recent earnings report, Ford raised its full-year guidance, expecting total pretax profit to surpass 2012's record year -- kind of a big deal! -- after originally expecting it to be "equal to or higher than 2012." I would also think Ford's 2.40% dividend yield has caught some investors' attention, especially those income-oriented ones. The company doubled its dividend payout in January 2013 and I wouldn't be surprised to see some sort of increase in the two-to-five-cent range come this January. Ford also reported a record automotive operation-related cash-flow of $1.6 billion in the recent quarter. This marked Ford's 14th consecutive quarter of positive operating cash flow; it now has $37.5 billion in liquidity -- one reason why the dividend could get a slight boost. With five vehicles in the top-20 U.S. sales, (including the top-ranked F-Series truck), it does not come as a shock to see that Ford has been 2013's top brand in terms of total sales. The 2.01 million units sold year-to-date handedly beat out Chevrolet's 1.65 million units, with the former outselling the latter by approximately 22%. There's also another bright spot in the U.S. auto sector: The cars on the road are at a record age. While I would agree that today's cars are made with more quality and integrity, it also supports the idea that more and more car owners will be looking to trade out of their old ride and into a new one. Historically, the average longevity for cars and trucks was 10 years, but that was pre-recession. In 2013, the average car lifespan was 11.4 years, a new record and an increase from 2012's 11.2 years. I suspect that General Motors (GM) and Ford, which control 18% and 16% of the U.S. market share, respectively, will benefit the most if buying continues to accelerate. Smaller losses in Europe helped Ford post a "combined profit for regions outside North America for [the] first time since [the] second quarter of 2011," aided by record profit in the Asia Pacific Africa region (quote compliments of the earnings release, linked above). China has emerged as an important region, with sales up 51% for the first nine months of the year compared to 2012. I summed up some of the potential in an earlier article:
Investment in the build-up of five new plants will double Ford's production capacity to 1.7 million units by 2015. The expansion will be necessary to help satisfy the 30 million vehicle sales estimated for the country in 2020 -- more than a 50% increase from 2012. That's nearly double the expectation of the 17 million units for the U.S. in 2020. Consider that for every 1,000 American citizens, about 800 have their own vehicle. Now compare this to China's 58 vehicle owners per 1,000 people and the growth potential becomes rather eye-opening.In September, Standard & Poor's raised its credit rating on Ford to BBB-, from BB+. The same rating was also passed along to Ford Credit -- an entity separate from Ford Automotive. The upgrade to investment grade from junk status will raise Ford's debt and bond creditability going forward, while borrowing costs for the company will go down. Headwinds and Potential Setbacks There's rarely a perfect story without a couple of headwinds. The speculation over whether Mulally will bolt for Microsoft is making the share price act hungover and is certainly a valid concern for Cramer, Link and any other investor -- including myself. Also, Ford's luxury line, Lincoln, is having trouble gaining traction. It's struggling to keep pace with GM's Buick and Cadillac lines, which have both quite handedly doubled Lincoln's vehicle sales year-to-date. While not necessarily in the same ball park as Jaguar, Mercedes-Benz or Audi, Ford is likely to continue struggling with the luxury line concept. To date, Lincoln has sold roughly 66,000 units, 3,000 shy of 2012's first 10 months of sales. If it's lucky, sales will come in flat year-over-year. Granted, the Lincoln brand is not the money maker that the Ford brand is, but prospective shareholders should be aware that its growth has been an issue. There's one other big overhang: The global economy. A slowdown in China would hurt Ford, even though only 8% of revenue came from the Asia Pacific/Africa segment in the previous quarter. A European slowdown would also be bad and could reaccelerate Ford's losses in the region. However, the real trouble comes if the slowdown hits the United States. About $21.7 billion of the $36 billion in third-quarter revenue came from North America, or about 60%. Fortunately, the economy is going in the right direction for now -- albeit, slowly. In the short term, there are surely risks. Cramer and Link are certainly not wrong for taking profits in Ford, and have done subscribers justice by doing what every trader or investor should be doing: Booking gains and shunning risk. That's one advantage of following two pros. Prospective buyers should be aware of the short-term risks, but should also stay focused on the road ahead.
Personally, I'm staying long.
-- Written by Bret Kenwell in Petoskey, Mich. At the time of publication, the author was long F, although positions may change at any time. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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