3 Reasons Ford and GM Stock May Be Ready to Rally

One of the mysteries of the ongoing recovery in the U.S. auto industry is why General Motors (GM) and Ford (F) haven't yet seen more upside in their share prices. Both are down 22 and 23 percent, respectively, since the start of the year. But both companies have been solidly profitable. So what gives?

Businessweek suggests that automakers are poised for a bounce because parts suppliers have been doing well, suggesting that the U.S. car companies will soon follow suit:

[Citi Investment Research analyst Itay] Michaeli wrote that for years, the gap between parts companies and automakers was valid because of consistent market share losses by the Detroit Three, big use of discounts to sell cars and trucks, an over-reliance on truck sales for profits and worsening credit profiles. But he now says the gaps have been addressed, and in some cases the automakers have an advantage.

There are some good reasons why Ford and GM may be poised for a rally:

1. They're the only bright spot in the entire economy. Want to invest in steady quarterly profits? Ford and GM have what you're shopping for. The market can't downplay this fundamental factor forever. OK, corporate profits have been up since last year. But are they going to stay there? Meanwhile, the U.S. auto fleet just keeps getting older and older. Pretty soon, there's going to be a serious buying surge.
2. GM and Ford have diversified their products. Ten years ago, both automakers were dependent on highly profitable trucks and SUVs. Not a problem -- until gas prices spiked in 2008. But now the "Big Two" have adjusted their lineups to include great vehicles in every segment. Ford probably has the best overall lineup in the auto industry right now, from the perennial best-selling F-150 pickup to the compact, inexpensive, fuel-efficient Fiesta.
3. Balance sheets are strong. Ford had much more debt than GM, which shed many of its financial liabilities during bankruptcy. Still, Ford can probably handle it and may even soon recover its investment-grade credit rating. GM has said that it wants to get a close to being debt-free as possible, a truly radical statement for a huge automaker. Of course, not paying interest means that GM can invest in R&D -- and its growing presence in the developing world.

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