If you’re looking for stocks that can do well over the long term, a smart idea is to identify past winners. Absent any major industry- or company-specific changes, it’s reasonable to expect these businesses to continue rewarding their shareholders in the future.
For investors who focus on the auto industry, Ford (NYSE: F) might be on your radar, particularly as it trades at a price-to-earnings ratio of just 12.3. Unfortunately, its stock has disappointed, producing a total return of only 20% in the past decade. The S&P 500 would’ve more than tripled your money during the same time.
This abysmal performance gives me zero confidence that Ford can produce market-beating returns in the years ahead. Therefore, it’s a business I’m not touching with a 10-foot pole.
Easy to be bearish
By taking a closer look at Ford under the hood, investors won’t struggle to find things they dislike. One of these factors relates to its muted growth prospects.
In the past 10 years, from 2013 to 2023, Ford’s sales increased at a compound annual rate of only 1.8%. Global gross domestic product (GDP), which measures the growth of the overall economy, has risen at a faster yearly clip. The fact that Ford can’t keep up with this is a troubling sign.
This unfavorable situation also points to the maturity of the auto industry. According to the International Energy Agency, there were 74.8 million passenger vehicles sold worldwide in 2022, barely higher than the 73.8 million sold in 2012. This doesn’t provide a healthy backdrop for Ford to post outsized gains.
Moreover, profitability has never been anything to write home about. Ford’s 2023 operating margin of 3% is lower than it was in 2013. Ford’s operations are capital-intensive, so it must always spend heavily on its labor force, research and development, manufacturing capabilities, and marketing efforts. This doesn’t give me much reason to be optimistic that the bottom line will improve.
External factors
What makes investing in auto manufacturers especially troubling is just how exposed they are to variables outside their control. The status of global supply chains or labor relations can negatively impact the sector. Additionally, changes in interest rates or inflation can pressure consumer spending habits, reducing demand for new vehicle purchases.
Even Tesla, the historically fast-growing and now profitable electric-vehicle (EV) leader, is starting to realize that it can’t escape the issues that plague being a carmaker. The company’s sales and margins are taking a hit in the current environment.
Tesla’s edge, however, is that it possesses an economic moat. It has a strong brand, which has generally allowed it to charge premium prices, compared to its rivals. And its focus on bolstering its EV manufacturing has resulted in cost advantages when producing cars.
It’s hard to argue that Ford has an economic moat of its own. The brand has been around since 1903, but there are numerous larger traditional car companies that are also competing on all the same factors, whether that’s design, pricing, product features, or maintenance and repair requirements. Because Ford’s profitability hasn’t improved over the years, there doesn’t seem to be any benefit from scale.
No matter how reasonably valued the stock looks or how hefty the current 5% dividend yield is, I don’t see Ford producing returns that will come close to matching the broader S&P 500 in the long run. And that’s why I won’t touch it with a 10-foot pole.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
1 Stock I Wouldn’t Touch With a 10-Foot Pole was originally published by The Motley Fool
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