The Real Story: Taking a Test Drive at Ford

The automaker has all kinds of trouble, which is why one savvy contrarian thinks it's a buy.
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In order to be a good contrarian, you have to revel at others' surprised reaction to your against-the-grain picks. Take, for example, Jeffrey Spotts, portfolio manager for Prophecy Asset Management, who laughed heartily when I told him I couldn't find any fundamental reason to like his idea of buying shares of

Ford Motor

(F) - Get Report

.

Being a technical analyst, Spotts is not especially interested in how many Ford Explorers are sold or if legacy health care costs are rising. What's important to him is how the stock trades -- and trade it has.

In the past two weeks, shares of Ford have traded higher on very heavy volume. "When I see big volume come in at low prices, I have to notice," he said. (The stock did fall 4% Thursday on 30.7 million shares vs. its three-month daily average of 19.7 million.)

Spotts, who recently bought the stock personally as well as for clients, points to the extreme negative sentiment on the shares. December's short interest of 96.9 million shares is up 53% vs. July and 22% vs. November. He also likes the fact that the recent shorts are underwater, something that could lead to a squeeze.

On the fundamental side, it's hard to drum up some enthusiasm. While most agree that Ford is in better shape than rival

General Motors

(GM) - Get Report

, keeping up with GM's recently announced price cuts won't help. The big problem is that Ford isn't exactly wowing customers.

George Magliano, director of automotive industry research for the Americas, at economic forecasting firm Global Insight, carped: "There's nothing exciting about Ford."

Ford lacks a "gotta have" product, according to Michael Robinet, vice president of global vehicle forecasts for automobile research firm CSM Worldwide. The Ford Edge "gets them part of the way there," he says. "But the Japanese have been selling these kinds of cars for five or six years."The Edge is a crossover vehicle, which is like an SUV but built on a car's platform, so it burns less gas and handles more like a smaller vehicle. Crossovers were all the rage at the North American International Auto Show in Detroit this week, and the buzz was about how they're expected to outsell SUVs this year for the first time.

"It is not inconceivable for GM or Ford to have a product revival," Chris Atayan wrote on our sister site

Street Insight.com

earlier this week. "At some point these stories become interesting 'speculations' based on the notion of product revivals."

Pressed on when he would become interested, Atayan answered: "When they start building cars that people want to buy."

Like Atayan, I believe it's entirely possible Ford does in fact turn things around. And yes, costs are onerous. But I believe that, quite simply, if the company can sell more cars, its situation will improve.

However, I don't see any evidence that it's about to happen. But Jeff Spotts is an excellent stock-picker. Since its inception in May 2001, his firm has never had a down performance year, which is as specific as the hedge fund manager was allowed to be because of

SEC

regulations prohibiting marketing. If history repeats itself, you're better off betting with him than against him.

Back on the chart front, Spotts believes the volume on the shares indicates better times ahead for Ford. "Somebody is picking up shares down at these levels," he said. "If there was a bankruptcy risk, why is the stock trading higher than it was in March of 2003 when there were

also rumors of bankruptcy?"

Based on his analysis, Spotts believes there is risk in Ford shares to about $7.80. He believes the stock will trade up to the $11-$12.50 range in the intermediate term.

Another reason to like the stock -- analyst sentiment is pretty dismal. Just two buys vs. nine holds and seven sells. Also, Moody's Investors Service just downgraded Ford debt deeper into junk status, effectively catching up to its rival Standard & Poor's. Generally speaking, the debt rating agencies are better at analyzing the past vs. predicting the future, and occasionally are good contrarian indicators.

Ford also pays a fat 4.6% dividend, with an ex-dividend date coming up on Jan. 26. The dividend does not appear to be in as much jeopardy as GM's, but it is by no means guaranteed. Keep in mind, Ford announces fourth-quarter results and details on its restructuring plans on Jan. 23.

I have no problem with making trades based solely on charts. In the past, I have bought and sold many stocks that way. But Ford is a company that I just can't get behind. That said, when someone like Spotts, whose skills I respect, makes a bold a call such as this, I feel it's important to bring it to your attention.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany.