Recently Goldman Sachs upgraded Ford Motor Company (NYSE:F) to ‘Buy’ from ‘Neutral’ and raised the automaker’s 12 month price target to $19 from $18, which provides an upside of more than 23% from the current trading levels. At the same time, General Motors Company (NYSE:GM) received a much less favorable treatment from the investment bank, which downgraded it to ‘Neutral’ from ‘Buy’, revising down the price target to $40 from $47. We decided to take a deeper look at some of the motives behind these ratings updates, which give a completely opposite picture to how the two companies have been trading over the past year with General Motors Company (NYSE:GM) outperforming its slightly larger counterpart. Moreover, analyzing data of the hedge funds that we track also revealed that smart money is betting more on GM.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular stock picks in real time since the end of August 2012. These stocks have returned 142% since then and outperformed the S&P 500 Index by 84 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Goldman predicts that the success of Ford Motor Company (NYSE:F) shall lie in the new aluminum body F-150 trucks that it is due to launch this year, and is likely to steal General Motors Company (NYSE:GM)’s customers. As far as putting up a fight in this space is concerned, GM’s hands are somewhat tied for at least some time as it refreshed its pick-up series just last year and is now focusing on the lighter margin passenger car business.
Another factor at play here is the exposure of the two companies to China. General Motors Company (NYSE:GM)’s market share of the world’s second largest economy is 14%, as compared to Ford Motor Company (NYSE:F)’s 4.5%. Since the investment bank expects the Chinese economy to continue on its slowdown trend, GM will have to bear most of this cost.
As far as the valuation of the two companies is concerned Ford is currently trading at a higher twelve month trailing earnings multiple of 19.83 as compared to GM’s 16.12, owing to its higher PEG ratio of 1.15 as compared to 0.88 for GM. However, Ford could be a riskier investment in the future, in the event that rates start rising since it is more leveraged than GM. While General Motors Company (NYSE:GM) missed both the earnings and revenue estimates for the first quarter, Ford Motor Company (NYSE:F) managed to post revenues that were in line with the expectations but fell short on the earnings front.
Although during the first quarter the hedge fund interest in the companies, among those that we track, fell, Ford Motor Company (NYSE:F) faced a sharper decline as a total of 33 funds disclosed long positions with an aggregate value of $832.07 million at the end of March, as compared to 45 funds with $1.03 billion at the end of the previous quarter. Richard S. Pzena‘s Pzena Investment Management was the largest stockholder among these funds with 17.64 million shares valued at $284.66 million. On the other hand, General Motors Company (NYSE:GM)’s has been more popular as the number of funds with long positions declined to 103 from 107, while the aggregate value of their investments went up to $6.74 billion from $6.07 billion. The legendary investor, Warren Buffett‘s Berkshire Hathaway is the largest shareholder of General Motors Company (NYSE:GM) among these, owning about 41 million shares valued at $1.54 billion.
Neither feels like a particularly great investment at this point, despite Goldman’s support for Ford.