Automakers being slammed into reverse

Car sales in June hit their lowest level in more than a decade.

General Motors, for example, saw its U.S. sales drop by 18.5 percent. That’s one reason behind the company’s recent announcement that it’s cutting workers, production and its entire dividend. It may even sell some of its model lines.

At Ford, June sales plummeted by 28.1 percent. The company’s truck sales – where its F-series has been the company’s bread and butter – fell by 35.6 percent, while Ford’s SUV sales have fallen 40 percent thus far in 2008.

Even Toyota had a rough month, selling 21.4 percent fewer vehicles in the U.S. in June, year over year. Adjusting for the differing sales periods, its June 2008 sales output dropped 11.5 percent. Toyota’s Japanese rival Honda managed to eke out a 1.1 percent June sales gain.

Clearly, buyers are flocking toward smaller, more fuel-efficient vehicles. The diminutive Ford Focus sedan has seen its sales leap by 53 percent during the first half of this year.

Despite these trends, automakers have been busy lobbying against governmental requirements that they raise their average fuel efficiency by 4.5 percent annually between 2011 and 2015. Sure, guys – you continue to crank out your gas-guzzlers, and we’ll continue to find better places for our investment dollars than your downtrodden stocks.

Ask the Fool

Q: I’ve set some stop orders on stocks I bought at around 15 to 20 percent below the current price. This has resulted in my selling promising stocks before they have a chance to perform. What am I doing wrong? – R.H., Chattanooga, Tenn.

A: Stop orders are placed with brokers to automatically sell shares if they drop to a certain level. They’re meant to protect you if a stock suddenly plunges. But they’ll also kick you out of stocks that drop briefly. If you’re planning to hang on to a stock for years, you might want to just expect some volatility and avoid stop orders. But do keep up with your holdings regularly.

Q: Is it better for a company’s projected price-to-earnings ratio (PPE) to be higher or lower than the price-to-earnings ratio (P/E)? – M.L., Champaign, Ill.

A: The P/E is simply a company’s current stock price divided by its earnings per share (EPS) for the trailing 12 months. The projected P/E divides the stock price by next year’s projected EPS.

Investors like to see a PPE lower than a P/E because it means that earnings are expected to rise. Imagine Porcine Aviation (ticker: PGFLY) trading at $30 per share with EPS over the past year of $2. Its P/E would be 30 divided by 2, or 15. Assume that Porcine is expected to enjoy rapid earnings growth, raking in EPS of $3 next year. If so, then its PPE would be 30 divided by 3, or 10. Its PPE is lower than its P/E due to expected growth.

Remember, though, that earnings can be manipulated and estimates can be proven wrong. So don’t make decisions based on P/E or PPE alone.

My dumbest or smartest investment

I suffer from a horrible affliction: premature celebration. I find a good investment, make a little bit of profit, sell WAY too early, celebrate my modest success, and then watch the stock take off. For example, in 2003 I bought PetroQuest Energy at $2 a share. After a few months, I sold at $2.60. Yay for me! Fast-forward. The stock was recently trading around $24. So congratulations to me. I pocketed a quick 30 percent gain in 2003 and passed on the 60-some percent average annual gains over the last five years. It’s the 12-bagger-that-never-was. I’ve done this with many stocks. – Tom Knoebel, Clinton, Ohio

The Fool Responds: This is a common mistake. Think of any company that has soared over the long haul. We might wish we’d invested in it back in 1980 and held on, but there are lots of people who did invest back then, only to sell soon after for a quick gain. As long as a company is healthy and growing, with competitive advantages and a reasonable stock price, it’s often best to hold on to your shares.