(excerpt)

In most market environments, correctly forecasting the economic cycle is a key to success. For example, is the economy on a sustainable upswing, has it peaked and run out of steam, or has it bottomed and is now recovering? Practitioners spend much of their time analyzing these fundamental questions.

Whenever the stock market gets it wrong, a tremendous opportunity can be created. The anticipation of an economic downturn that fails to materialize opens the door for investors to scoop up stocks in unfairly penalized industries, particularly those in cyclical sectors such as the automotive industry, before those stocks recover to their fair value.

Fundamentally, the automotive industry has enjoyed a healthy renaissance from its darkest days in 2008 and 2009. ...

...Ford has reduced its automotive debt by more than $20 billion in the last two years, lowering its interest costs by more than $1 billion annually. Top line growth is ticking higher. Ford passed the two million unit sales mark in 2011, the first automaker to sell more than two million of its namesake brand in one year since 2007. The Ford Escape SUV hit record sales in 2011, while the Ford F-150 pickup truck was the nation’s top selling new vehicle. ...

...Another encouraging sign was Ford’s decision to reinstate its dividend, to $0.05 quarterly, starting in March. As an investment theme, dividend paying stocks gained in popularity during last year’s tumultuous market where above-average yielders held up nicely. Given that the low yields on Treasuries and CDs are likely to be with us for awhile, it’s likely that offering investors a dependable cash yield will enhance interest in their stock. Ford’s willingness to resume the dividend also demonstrates that the company has confidence in its cash flow. ...

...Even if much of the recent rally is a result of the improving macro economy, the improving company and industry fundamentals will help sustain interest in these companies’ shares.

Disclosure: Clients and employees of Mainstay Capital Management may hold the securities mentioned in this article in their investment portfolios. The securities mentioned may not be suitable for some investors, based on their tolerance for risk or investment time horizon.


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