One Way to Identify a Stock That’s About to Breakout

Sometimes there’s synchronicity to the story you can’t ignore

I started writing this article, which was going to focus heavy on Ford stock, about 11 days ago. I shelved it. I’m glad I did. Events in the interim have increased my conviction on Ford. Concurrently, the narrative forming around the company and stock indicates it’s time to buy and supports a qualitative approach to stock picking.

In this article, I illustrate part of my thinking on story stocks, using Ford as the latest example of a stock about to breakout.

It all started in recent months as I traverse Los Angeles daily on foot and by private motor vehicle. These billboards (see this article’s image) keep popping up all over:

Proud to be the only American automaker to stand with California for reduced greenhouse gas emissions.

This resonates with me for several reasons. I’ll keep this part short to avoid overly political discussion.

First, I’m proud to live in California where we lead on so many sociopolitical and environmental issues.

Second, it blows my mind that much of the rest of the country — encouraged, sadly, by the federal government — rebukes California’s progressive ways. We export so much of what makes the world tick, from Hollywood to tech to food. We know what we’re doing in our nation-state.

Third, there ought to be less resistance to situating large swaths of our economy around green initiatives. Ford appears to recognize this. The company continues to establish itself as a leader in green technology. It means something that it’s bold enough to publicly stand with California. This is an unpopular thing to do in this country. It tends to not sit well in areas that see environmentalism as a threat to an economy structured around fossil fuels.

So that’s the nutshell version of some of my conviction in Ford. It’s part of the story.

Ford stock has done nothing but go down and effectively languish in recent memory. I have been following it for years. I always hesitated to buy because there wasn’t a compelling story and, more recently, the company stopped paying a dividend. Now that I own Ford, I broke my own rule — it’s the only stock I own that doesn’t pay a dividend.

Now, the story has changed and the dividend might be about to.

Here’s an exchange between RBC analyst Joseph Spak and Ford President and CEO Jim Farley on the company’s most recent earnings conference call:

Joseph Spak

And then just lastly John, I saw in the media I think made a comment about how it’s too early to talk about the dividend reinstatement. I realize ultimately it’s a board decision, but I’ll this up I guess to Jim and John in each of your opinion should Ford give any dividend over the coming years given the transformation you’re talking about and if so, what are really the parameters you’re looking for, for reinstating that?

Jim Farley

Thanks for the question. I don’t think this is the time to have that discussion. I think we need to have that framed up in our total capital strategy and calls on capital and where we’re headed as a business and I think next spring would be the time to do that.

Ford could be on track to reinstate its dividend next year. I want to build a position in the stock at under $10 before it does.

Back to the story, which ends up being the impetus for this article.

Ford isn’t just standing with California on the environment, it’s thinking and acting like a tech company. Always a good signpost in a compelling stock story.

Thinking and acting like a tech company. This has always been a key component of my conviction in stocks I sensed about to breakout and breakout big over the long-term.

Consider what I wrote about Domino’s Pizza in April 2012:

Domino’s found a way to change how a large percent of its population orders pizza. That number should continue to grow. As it does the company becomes increasingly efficient and, if my experience serves as an indicator, builds a larger and more loyal customer base.

The “way” Domino’s “found” was to leverage a digital and mobile platform to engage consumers before most food and beverage — or even broad retailers for that matter — had done so.

Domino’s stock is up more than 1,000% since I wrote that article.

Consider what I wrote about Starbucks (and Domino’s) in February 2013:

With their mobile and digital platforms, Starbucks and Domino’s create engaging and addictive experiences.

And they’ve only just begun, both in terms of scale (look out international) and features. Soon, you’ll likely be able to walk into a Starbucks and, if you’re not on a first-name basis with the barista, have your drink paid for and ready the second you walk through the door. That’s innovation. And that’s some of the best tech has to offer right now.

Since I first wrote about Starbucks’ in July 2011, the stock is up roughly 460%. Nearly a decade later, we don’t think twice about prepaying for your drink via the Starbucks mobile app.

More recently, I classified CVS Health as what amounts to a tech company building a comprehensive ecosystem:

A visit to your local CVS can lead to a multi-faceted, multi-layered relationship. CVS can be one of your healthcare providers, far beyond picking up a prescription. In and out of the store, CVS appears to have a strategy of getting in your face, of being everywhere, all of the time to acquire you as a customer across the many areas it does business.

And it’s a tech approach — practically and via mindset — that drives CVS’s strategy.

Since I wrote that article a few weeks ago, CVS stock is up more than 26%.

You can see the pattern developing.

Ford is following, to a similar degree, in Domino’s, Starbucks, and CVS’s footsteps. In the 11 days since I set this article aside, we have seen the Ford story take shape to an increasingly convincing extent.

Just the other day, CNBC’s Jim Cramer continued pounding the table for Ford stock. Shortly thereafter, Ford confirmed it might start producing its own electric batteries as part of its electric vehicle push:

Ford is set to release its all-electric Mustang Mach-E very shortly to be followed by the electric Transit commercial van next year and an all-electric version of its flagship F-150 pickup in 2022.

It’s generally difficult to scroll these days without tapping on a story getting behind Ford as a company and investment.

Some investors will scoff. They don’t like my qualitative and somewhat anecdotal approach. This is okay. I’m used to it. I spent my college years conducting research using both quantitative and qualitative methods. I love, use, appreciate, and value both ways of seeing the world.

With stocks, particularly beaten down stocks like Ford, the numbers just aren’t there (however, things do seem to be trending in a positive quantitative direction at Ford). In my time writing from this perspective, it’s difficult for a considerable number of investors to wrap their heads around the stories I present in this article:

• They have a tough time viewing non-tech companies as tech companies.
• They refuse to let the well-informed, albeit speculative qualitative story lead before seeing hard quantitative confirmation.

But isn’t this what sits at the heart of picking stocks? Of anticipating a significant breakout. Once the numbers come in, I won’t say it’s too late, but the early part of the breakout is — at least — well underway.

I aim to find stocks that do two things:

• They don’t participate in broad rallies.
• Investors seem unwilling or unable to see and connect the more conceptual, theoretical, and visionary parts of the overarching strategy and story.

CVS Health sat out most of the pandemic stock rally. It only recently started making a strong move to the upside. Same with Ford. So I am long both stocks and incrementally adding to my positions. For the record, I also own Starbucks. I do not own Domino’s Pizza stock.

All of this said, I tend not to recommend individual stocks. I can only recommend stocks to me, myself, and I, because I have intimate knowledge of my personal financial situation. I don’t have the same familiarity with yours.

That said, the point is to rough sketch one way of many to craft and consider the story of a stock. It’s more than a hunch, gut feeling, or intuition. It’s more than pure speculation. It’s an accumulation of data from the company itself and bit and pieces in the media. It’s our job as stock pickers to take that data and those bits and pieces and put them together into a coherent narrative that supports a strong, long-term conviction.