Usually in a situation like this one, the trade is to buy the underperforming stock -- GM in this case -- and sell the outperforming stock, or Ford.
The strategy is known as a "Pairs Trade," and can take weeks or months to play out. The rationale is that the two stocks will revert to the mean of performance.
In plain English, Ford would decline and GM would appreciate, giving the investor a double win so to speak, while limiting downside risk.
This scenario is different, though, because GM deserves to be cheaper. I wouldn't expect Ford to decline simply for the reason that it has outperformed GM.GM is shelling out enormous amounts of money to make its recall issues and criminal investigation worries go away. The company is facing a plethora of first-quarter charges: $750 million for recall repairs, $400 million for currency swings in Venezuela, and $300 million for restructuring costs in Europe, Brazil and Australia. To be fair, Ford faces a $350 million charge for its own currency issues in Venezuela. Furthermore, GM still potentially (and likely) faces payments to a victims' compensation fund and settlement costs with the Justice Department, each of which will likely run into the billion dollar range. Ultimately, the company will likely lose several billion dollars because of the recalls. A few billion dollars may seem irrelevant to a company the size of General Motors. But consider that the company made only $3.8 billion in profits in all of 2013. When choosing between two automakers that share similar positive qualities, I'm going to stick with Ford, the one that doesn't bring the Justice Department, multi-billion fines and negative publicity with it. After all, I don't think shares of GM will rally at the expense of Ford. At the time of publication, Kenwell was long Ford. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. -- Written by Bret Kenwell in Petoskey, Mich. Follow @BretKenwell
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV