Long Ferrari (NYSE:RACE), Short Ford (NYSE:F)

Long Ferrari (NYSE:RACE), Short Ford (NYSE:F)

$RACE $F

Both Ferrari (NYSE:RACE) and Ford (NYSE:F) make and sell cars but their business models are different:

  • Ferrari is a luxury goods company. It sells about 10,000 cars annually and realizes high profit margins. There is a limited supply of Ferraris and a waiting list to buy. Its earnings are more stable and defensive. Most customers are more than clienti, they are fans of the brand.
  • Ford (NYSE:F) sells millions of cars to the middle class. Its biggest moat is its scale. It realizes low profit margins due to intense competition. The nature of its earnings is highly cyclical.

RACE sells at a premium to the auto industry and the S&P 500 overall.

F at a discount to its peers and the S&P 500. In early Y 2018, F sold at 5X P/E. The market thought F was expensive at a discount P/E for many reasons and was prepared to sell it every day. F is a loss making company.

Long story short, look at the company´s financial statements and you will realize they both deserve their multiples.

There is even more, the C-19 coronavirus chaos is presenting real threats to the auto industry.

I believe there is a probability of a government bailout for the Big 3 US automakers, Ford, GM and Fiat-Chrysler, in the next 12-18 months. If a bailout happens, repayment will become management’s Top priority and will significantly impair the business ability to grow. Depending on the terms, current shareholders could/will be heavily diluted.

I expect RACE to continue to significantly outperform F, especially during a recession.

RACE has 3X’d since its IPO in October 2015. During the same frame, F has gone from 14 to 5.16, or about -65%. Below you can see both stocks individually and as a spread Vs the S&P 500.

Buying RACE in the past was a great investment, but you could have realized a greater return shorting F and using the cash to buy into RACE shares.

And due to the correlations these 2 stocks exhibit, you would have hedged market and industry risk, thus achieving a greater return assuming considerably less risk.

The RACE/F spread has performed extremely well during the recent market selloff. As the broad market went into a 30% drawdown, the spread rose close to 50% meaning RACE lost less than F.

The trade:

As seen in the above, the trade is market or beta neutral, but it has a rough +7% net dollar exposure.

Please note beta-hedging is far from perfect as betas change every day. Should either stock move considerably, you will have to re-balance in order to be correctly hedged.

All volatility metrics indicate RACE has been and is expected to be less volatile than F.

The fundamentals are in place for Ferrari to outperform Ford. Ferrari is a great stock to gain exposure in the autos and luxury industry.

Ford is an excellent candidate to hedge market and industry risk.

Ferrari is The Aristocrat of the automotive sector.

Enzo Ferrari’s iconic Italian Supercar manufacturer claimed the title according to the latest Brand Finance Global 500 2019 report launched at the World Economic Forum in Davos.

HeffX-LTN overall technical outlook for RACE is overall Neutral with a Bullish bias, there is Key resistance 167.97, and Key support is at 157.23.

Our overall technical outlook is Bullish to Very Bullish in here

Ferrari finished Friday at 159.39, +2.58 in NY.

The Maranello Outfit’s shares were raised to Buy from Hold at HSBC.

Ferrari will continue to create value in the long term. Ferrari is a quality 1st long term luxury products investment, and I have called it at it at 200+/share long term, adjusting it to 200/share short term (after the virus) and siding with BAML to 230 long term for now. The stock is not considered defensive in the sector.

Have a healthy weekend, Keep the Faith!

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he it the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.