Buy American, But Not Ford and GM

NEW YORK ( TheStreet) -- Doug Kass wrote an excellent column last week for TheStreet's Real Money premium service. In "More Than Ever, Buy American," he outlined 10 reasons why he remains bullish on U.S. equities.

While I am not quite as optimistic as Kass, I do agree that the U.S. ranks near, if not at the top, of the best places to invest in the world.

Ford

I'll state the obvious now. If you're going to buy American, proceed with caution on two of the companies that are defined as quintessentially American: Ford ( F) and General Motors ( GM).

Do not expect a stable eurozone any time soon. And think twice about automakers such as Ford and GM that have significant exposure to Europe.

Of course, we received a loud and clear warning from Ford last week, via a regulatory filing.

The company announced its international loss in the second quarter would be roughly three times as much as the $190 million hit Ford's international unit took in the first quarter.

A handful of readers ridiculed me for the things I said about Ford and GM in "Ford, GM: Two Stocks I Would Not Touch With Your Money".

For example, one commenter who goes by the handle "michmnn" responded to a comment that classified the article as "interesting":
It's only interesting in that it exposes the authors lack of knowledge about the auto industry, how does "The Street" screen these writers?

Given the way the stock market gyrates these days, I'm not one to make much of short-term moves in stocks.

That said, it's interesting to note that when that article was published, Ford shares were changing hands at $10.01 and GM shares were trading at $19.85.

In Friday's trading, Ford shares dipped as low as $9.46 and ended the day at $9.59. GM fared a bit better, rebounding from an intraday low of $19.24 to close at $19.72.

I expect further downside or, at the very least, range-bound stagnation in both names for the foreseeable future.

It's about more than Europe, though. And it's certainly not about knowledge, or lack thereof, about the auto industry. That's a big mistake. Your "knowledge about the auto industry" will not take you all that far when selecting stocks.

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.

You want the consumer who frequently buys expensive stuff they really do not need from Lululemon ( LULU) and shops for groceries multiple times a week at Whole Foods Market ( WFM).

For better or worse, these people are not, by and large, buying cars that Ford and GM produce.

When I look at a stock, with few exceptions (the big media space being one), I do not create an industry profile. Rather, I consider whom the company targets and the business model it uses to go after the market that provides it with revenue. That's what matters.

I really do not need to know much about the auto industry to know that both Ford and GM face uphill climbs as they target the mass market.

Certainly, both stocks have gotten "cheaper" over the last year, but, after you consider the outlook for the Ford and GM's target customers, you should realize the reasons why. True value plays exist, but without a feasible narrative that describes a realistic way forward, you're better off speculating elsewhere, buying into the broader market if you're generally bullish or going with blue-chip stocks that present fewer question marks.

At the time of publication, the author held no positions in any of the stocks mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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