Market has digested the September-October ~10% sell-off with a rally back to the high again in just a few days. It’s important to evaluate the merit of such run-up, in order to predict the next direction. 

1. Market started to turn around to the upside at the beginning of Q3 earnings season, the week when the banks kicked off with their earnings. The banks booked good profits, and market received the sentiment that earnings season is going to be good. Hence the run-up, strong buying pressure, taking us back to the high. However, it’s important to recognize that the majority of companies is not banks/ financials. We still have technology companies which have yet to report, and to name a few, 25% of the S&P500 which are Facebook, Amazon, Apple, Microsoft, Google. They haven’t reported yet, but their stocks have run up so much that we worry once they actually report, investors will find reasons to sell. See Netflix and Tesla for example. 

2. The merits of the sell-off didn’t get resolved. The sell-off was mainly regarding inflation fear and monetary policy by the FED. Inflation is still here, we didn’t get data to indicate easing of anything (oil remains high, companies continue to warn about higher costs). We also didn’t hear anything new from the FED that’s different from what we know during the sell-off (that is, the rally wasn’t helped by any statement from the FED). In fact, the FED is again due to speak on Nov 5th, which is another unpredictable event.

3. Greed and complacency are back in the market. See CNN’s Money Greed and Fear Indicator, which indicates market is at greed status right now (not good - when everybody is bullish, who's left to buy?). Call options are outpacing puts again, which also indicates bullishness. Volatility Index (VIX) is lowest it has ever been this year, and please trust me on this, when it gets this low, it bounces back to the upside, meaning we're going to face some volatile times (meaning sell-offs). 

Given the 3 points stated above, we think the recent run-up in stock was not strong in merits, therefore deserves to get sold. We acknowledge there is also strong data indicating we’re entering a seasonally strong period. However, we choose to not be completely complacent, will take profits whenever appropriate, not be so greedy. 

Ford hit a new 52-week higher earlier Thursday after another analyst came out positive on the stock. That’s two days in a row of positive analyst activity. Shares rallied Wednesday after Credit Suisse upgraded Ford to an Outperform with a $20 price target, and Ford is on the run again today after JPMorgan increased their price target to $20 from $18. 

Here is where the JPMorgan's analyst stand on earnings estimates; we will bank on this to determine our price targets. For 2021, they lowered estimates to $1.44 from $1.60. That means currently Ford is trading at about 11.5x this year's earnings (a little extended historically). For 2022, they lowered estimates to $1.75 from $1.85. That means currently, Ford is trading at about 9.5x next year's earnings. This is in-line with what we expected from Ford shares when we initiated the name, calling for a ~10x forward multiple on how the company should be valued based on what they are currently doing. However, we believe much upside still remains in the stock, calling for a forward multiple greater than 10x. As we've written endlessly, how Ford can expand its forward multiple to become a growth-like company is reliant on its capitalization of the nascent electric vehicle market with its best-selling truck F-150, bringing in reliable, forecast-able subscription revenues from self-driving and battery technologies. Lastly, with the CEO continuing to do a tremendous job in turning-around the business by cutting costly and unprofitable segments, we think Ford shares will be rewarded by the market with upside surprises in earnings.   

Now, given all that we've said about how bullish we are in Ford, we think it is only right to capitalize on this recent 30% run-up in the stock. Our cost-basis in Ford is 13.25$, previously taking up 25% of our portfolio (heaviest). With shares sitting at 52-week high, we took a small position off the table, and now Ford is 20% of our portfolio (still heaviest, but less heavy than 25%). Our concern is that sentiment may have become too positive ahead of earnings, which is never good. We prefer to buy stocks of high-quality companies with positive fundamentals when sentiment gets too negative, like back in July when we kept writing about and adding to our Ford position in the 13s. 

And to give a forward outlook on this stock, JPMorgan's analyst forecast 2023's earnings will be 2.65$ per share. To do simple math, if you just slap a 10x forward multiple on this stock, you can expect shares of Ford to trade in the 26$ range in 2022. Lastly, for shareholders, it's also the right time to start thinking about a return of capital from management, either through the forms of dividends or share buybacks.