The great Warren Buffett once said, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” Buffett’s statement is the complete opposite of what fund managers do these days with their very diverse portfolios. But you know what, those fund managers usually fail miserably.
I’m with Buffett on this one, and in my portfolio I’ve swung for the fences: 40% of my portfolio belongs to positions in Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM). Right now I’m sitting on a healthy gain and I’m not taking profit just yet. Here’s why Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) will both remain a huge chunk of my portfolio for years to come.
I cover the two companies pretty thoroughly for The Motley Fool, and know that one downside to owning stock in Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) is that macroeconomic concerns often lead to severe sell-offs in auto stocks. This happens regardless of how well either company does on its top-line revenues and bottom-line profits. For most investors, it’s a continuing headache; for savvy investors, its a consistent opportunity to buy on dips.
Right now North America is a primary source of growth for auto sales, and there’s reason for optimism in the short term. Here’s a representation of the auto industry’s recent seasonally adjusted annual rate of sales, or SAAR:
April was a minor speed bump – the overall trend is improving and is still far ahead of levels seen after the great recession. Here are some reasons to expect SAAR numbers to remain strong this year and improve in 2014.
The fleet of vehicles in the U.S. is still old, credit is still easily available, and gas prices are reasonably stable. We’re seeing proof that housing recovery is taking hold, giving consumers some of their wealth back and stoking more confidence in the improving economy.
Detroit automakers must agree, as Ford Motor Company (NYSE:F) announced it was reducing by half the length of its typical summer shutdown for 20 of its North American plants to meet increased demand. Chrysler is following Ford’s lead and leaving three plants open all summer, and reducing many plant shutdowns to only one week. In addition to that Ford Motor Company (NYSE:F) plans to increase its third-quarter production by 10% compared to last year.
As construction and the housing sector continue to improve, it’s sending a surge to the most profitable auto segment – full-size pickups. Ford and GM estimate that they get over half of their profits from this segment, and are in the perfect position to capitalize with fresh products. We’re on the eve of seeing General Motors Company (NYSE:GM)’s 2014 Silverado launch, and Ford Motor Company (NYSE:F)’s redesigned F-150 hits the market next year.
Down the road
In summary, things look good for the short term. The long-term view is even more appealing when looking at catalysts that can boost stock prices significantly.
Ford expects to lose about $2 billion in profit as the dim outlook in Europe continues. The situation is similar to what we saw in the U.S. during the great recession, but management has learned from that experience and is exporting a turnaround plan to Europe – expecting to break even by 2015. Simply breaking even would directly boost Ford and General Motors Company (NYSE:GM)’s bottom-line profit significantly.
North America generates most of Detroit’s auto profits, but there is immense potential for growth in China as the decade progresses. Consider that China’s automotive market will grow so quickly through 2020 that it will create sales growth comparable to the size of Europe’s entire market at today’s level – about 12 million vehicles.