Monday, August 25, 2008

Automakers

"You make money when you buy, not when you sell." So says the old adage. It's especially important to keep this in mind in today's market. Buying opportunities abound, and now is the time to take advantage of that and make your money.

I must admit, I have a soft spot in my heart for Detroit. That was where I was born and raised. And the entire southeastern part of the state of Michigan is dependent on the automakers staying in business. So whenever talk of the Big Three (or Two, if you prefer, since Chrysler is now privately owned) going bankrupt surfaces, I take note. But no matter what you hear, I believe the chances of them going bankrupt is very remote.

Here's why: If Ford or General Motors, for example, ever filed bankruptcy, it would likely shift consumers immediately away from their products and to those of its competitors, further hurting revenue. Because that sudden loss of customers would make it nearly impossible for the company to recover from bankruptcy, a more likely scenario would be a recapitalization of debt, and favorable concessions from suppliers and unions to ease the financial burden. It could also mean that new debt sources could be found at more favorable terms.

The government, having bailed out Chrysler in 1979, is well aware of the consequences of a major automobile manufacturer going out of business. It wouldn't just be GM or Ford going out of business. It would also mean the end for the hundreds of auto parts suppliers in the region, including Delphi, Visteon, and Johnson Controls. The trickle-down effect would be devastating.

So how does this tie into the old "you make money when you buy, not when you sell" adage? Ford and GM are currently trading near their 15-year lows. The outlook for them is bleak. Everyone is dumping shares. But, for the above reasons, I don't think these companies are going to go away - and it is time to look at them as long-term recovery investments.

Buying near 15-year lows gives you two advantages: You are buying at a very low price, so the upside is huge. At the same time, that low price makes your downside relatively small in the unlikely event that they do go bankrupt.

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