Whether the action can be accredited to the greatly debated Cash for Clunkers program or if it is merely the effect of natural economic forces, there is good news out of the auto industry these days… finally.

First, there is word from General Motors (NYSE:GRM) that it plans to expand production at three of its manufacturing facilities. For the nearly 2,400 workers that will be invited to work on the third-shift line, the news is the best they have heard in a while.

It is a similar story at cross-town rival, Ford (NYSE:F), except few American workers will be clocking in for the new shifts. The company is widely expected to announce its plans for a third major production facility in China later this week.

Ford’s news is strong evidence of Asia’s long-term growth potential, especially for American car manufacturers dealing with a weak currency back home.

A bit further down the supply chain, Dana Holding Corp. (NYSE:DAN), a major automotive industry supplier,  is adding to its spectacular six-month run today as its shares surge by nearly 30%.

The stellar gains come as the company kicks off a public offering of 27 million shares. The sale, which is likely to bring in close to $200 million, will be used to repay the company’s massive debt.

While $200 million won’t pull the company out of debt, it will help. The heavy load created by over a billion dollars in debt was one of the driving forces that took share price as low as $0.19 over the last year.

With shares of the company trading for close to $7.30 today, investors who got in at the bottom are sitting on gains of more than 3,700%. Not a bad profit for six months.

Room for more gains?

Over on the retail side of things, the situation is nearly as optimistic.

CarMax (NYSE:KMX) shareholders are smiling today as their company’s value has surged by double-digit proportions on news that the company’s second-quarter sales were better than expected.

Thanks to the crowds awakened by the Cash for Clunkers incentive program, the massive car retailer raked in a record-breaking profit of $103 million over the past three months.

Now the big question on everybody’s mind is will the profitability and growth be sustainable?

Already, there are signs the industry is beginning to slow. Some reports have new-car showrooms even emptier than before the massive incentive program. If that is the case, those recalled workers may be back in the unemployment line all too soon.

If you are a long-term investor, you can afford to keep your shares in the game. Eventually, today’s prices will look cheap.

But if you can’t stand some short-term volatility or are sitting on a hefty pile of profits, now would be a good time to pull some chips from the table.

Detroit has found safety in a calm meadow, but it is not out of the woods yet.
Source: Detroit Update: Finally Some Good News?

How would you like to have been the guy that bought shares of Ford (NYSE:F) when they dipped to a 27-year low of $1.01 back in November? If you were lucky enough to have made the move, a thousand-dollar investment would now be worth just shy of $7,500.

Thanks to today’s news that the company saw its first year-over-year sales increase since late 2007, shares of the company are up by about 6%.

Of course the success comes to the detriment of its recently bankrupt competitors, General Motors and Chrysler, which announced declines of 19.4% and 9%, respectively.

While the quick billion-dollar burst of the Clash-for-Clunkers plan will get all the credit from Washington, there are several factors involved in the surge in buying.

First, with bankruptcy filings now in the history books, the market is filled with much less risk and uncertainty. That means wary buyers now know who will be around next year and who will be joining the growing list of economic casualties.

Of course, Cash for Clunkers is making its mark. But only time will tell if last month’s figures are destined to become an anomaly as the funding eventually dries up and vanishes or if buyers will continue shopping even when the free money runs out.

More importantly that what is compelling buyers to head back to dealerships is the list of companies bound to profit from the government’s free money and the turnaround in demand.

Who gets my tax dollars?

Ford is obviously one beneficiary. And with the market bidding shares of the company up today, the market has already spoken its obvious bullishness for the company’ s future revenue-generating potential.

Some other companies worthy of the attention they are getting today are the big dealerships, like Sonic Automotive (NYSE:SAH). Shares of the small-cap company are up by double-digit proportions as the market re-figures the impact of several billion dollars worth of new-car buying.

With nearly 140 dealership franchises, you can bet the company’s bean counters are preparing for a few extra zeroes on the next accounting statements, especially if the Senate caves later this week and dishes another round of cash.

Of course, the nation’s automotive supply chain runs deep. Some analysts even draw it as long as the corner donut shop down the street (blame the unions).

A bit further upstream than the donut shops, look at the action at ever-volatile Dana Holding (NYSE:DAN). Shares of the parts maker are soaring by 20% today as investors rush to get in before Detroit makes a rebound that mirrors the broad market’s recent moves.

Now, before you get all jumpy thinking today’s action will continue for weeks or even months, let me explain how hype-driven investments work.

Rule number 1: It doesn’ t last.

Rule number 2: If the government is in charge, be cautious.

Rule number 3: Take your profits and run.

This message is not so much for the folks looking to get into a few goods stocks, but for the investors looking for a signal to get out.

Volatility is getting sheepishly low. It scares me.

Stocks don’t like to make broad turnarounds when everybody is looking. Instead, they do it when nobody is looking. Or, more succinctly, when presidents exclaim, “mission accomplished.”

If you want to be greedy and stick it out, you have a few more days. But in auto industry, I am a seller, especially after today’s moves.

There are simply too many other under-valued, low-risk plays to be made to be investing in an industry running on government whims.

Source: Three Winners from Cash for Clunkers

This from Today’s Financial News:

Detroit is once again on its knees in Washington begging for help. The nation’s automakers are desperate to paint a dire picture of their financial woes.

Whether their pleas are founded or are merely lame attempts at grabbing some free advertising is up to you to decide. To me, it is all a show. After all, the Big Three have not had this much free TV time since the last time they were begging for a handout.

Today, Ford (NYSE:F) is tugging on the economic hearts of Americans by releasing a report that shows if it fails over 3,000 workers in at least 25 states will lose their jobs. It is a disheartening failure, but last I heard Ford claimed it was not in danger of failing.

The company’s latest figures show Ford has a cash horde of over $18.5 billion and is planning to increase that position (through cutbacks and sales of assets) by as much as $17 billion in the near future. What’s more, Ford has ready access to a $10 billion line of credit.

If Ford has enough cash to keep its creditors at bay and its operations running, why is it on Capitol Hill begging for money?

Simple answer: easy money.

If somebody were to offer you an ultra-cheap loan that would increase your profit potential, wouldn’t you take it? As long as the interest rate (Congress is proposing a 5% rate) is lower than what Ford is currently paying, which it most certainly is, the loan is a good idea.

But Washington is not in the business of loaning corporations money, or at least it is not supposed to be. Congress needs to ensure it only intervenes in the most serious cases.

General Motors (NYSE:GM) with its dangerously low liquidity may truly need help, but Ford does not. If Ford gets a piece of the bailout action, Congress will unleash an avalanche of cries from major companies across the country searching for similar help.

Invest in the supply chain

Washington has the potential to send a handful of auto-related stocks soaring. While Wall Street is focusing on the Big Three, their suppliers are the ones truly getting a bailout. Many companies depend solely on the health of Detroit to fund their profits. If General Motors were to disappear, so would they.

That is why smart investors are not focusing on whether or not Ford, GM, or Chrysler will get a loan from the Treasury Department. They are looking to see which companies will benefit the most from a Washington-induced cash infusion.

Check out companies like American Axle and Manufacturing (NYSE:AXL) and its $1.50 share price. Or Magna International (NYSE:MGA). And you cannot miss Dana (NYSE:DAN) and its recent credit downgrades.

All three of these companies would likely see a strong surge in share price if news of successful bailout package leaks out of Washington. But you must not get carried away with your profit expectations. Analysts are already expecting some sort of industry relief, so government assistance is already priced into share price to a degree.

Anytime I find a stock that is about to make a big move in one direction or the other, I instantly think of a straddle opportunity. This options strategy (an investor buys call and puts options on the same strike price and expiration) will profit as long as the underlying stock makes a significant move in either direction.

This strategy may be unknown or confusing to many investors, so let me know if you would like more details. If I get enough demand, I will create a strategy for you to follow and post it on the site.

A desperate situation

There is no doubt that Washington has its work cut out. Detroit is begging for help. Americans know it is wrong to intervene with the free markets, but do not want to see their fellow citizens lose their livelihoods.

As investors, we must stand back and take an objective look to it all. When we do, the profit opportunities begin to shine through quite clearly.

Take a look at the automotive supply chain and the companies upstream of Detroit that will profit from Washington’s blank check.

I will leave you with this as food for thought: Obama’s economic aides are telling us any new economic stimulus must focus on the middle-class and not the nation’s rich elite. Their reasoning is that average Americans are better at spending their money than the nation’s upper class.

Source: Profit from Washington’s bailouts

With a share price of 45p and a market value of just £2.7m LitComp (LON:LIN) is a real minnow, but what looks like a clear case of under-valuation is supported not only by broker Daniel Stewart’s forecast of earnings per share of 10.6p for the year to March 2009, but also by the fact that the business is strongly capitalised with net cash of £3m.

Even in the current market conditions this was enough to provoke a flurry of activity in the shares after the announcement of annual results last Wednesday, but there should be more to come.

First, though, let me address one item that arguably has been holding back the shares and does have a significant impact on financial projections.

This concerns LitComp’s 10% convertible loan stock. £3.151m of this is still outstanding and it must either be converted into equity or redeemed by October 31st. Given that holders can convert into shares at a price of 30p, 15p below the current share price, it would be surprising if they did not elect to do so and I understand that 48% of the loan note holders have confirmed their intention to convert.

Assuming that all do the same the number of issued shares will increase from 6.1m to 16.6m. Daniel Stewart’s 10.6p earnings forecast assumes this to be the case, and also of course allows for the savings of interest rate payments on the loan stock.

When LitComp switched to AIM in 2006 it made clear that it intended and expected to rapidly grow a subsidiary called Elite Insurance and having reported a 115% increase in revenues from this source in the latest financial year, Litcomp has certainly delivered.

Elite specialises in AEI, which is short for ‘After The Event Insurance’, and most of such ‘events’ are instances of personal injury. 1.7m people sustain injuries each year, of which 750,000 result in a claim for compensation. 70% of these injuries are from motor accidents, while the rest largely result in claims against employers or the public sector.

No win no fee… not quite

In case you ever suffer from an injury, this is typically what happens. A solicitor will agree to take your case on the basis of a success fee. In other words the solicitor will only be paid if he wins the case.

However that does not mean that the pursuit of compensation is entirely risk-free for the claimant. There will be incidental charges, such as those for medical reports, and although the solicitor will pay for these at the time, the claimant will eventually be responsible for their cost.

There is also the possibility that the claim will fail, in which case the claimant will receive no compensation and may be responsible for the other party’s costs. For these reasons claimants will usually insure themselves against having to bear unavoidable costs in the event of their action being unsuccessful.

Within this process there is another opportunity for the provision of financial services, and that is the advance of loans to solicitors which are usually conditional upon the solicitor’s client having taken out insurance.

Litcomp is thinking of entering the market for the supply of finance to solicitors but for the moment is only involved in providing insurance cover for those making claims. It does not, though, confine itself to personal injury claims. It also offers insurance for those pursuing claims in other civil cases such as custody disputes and in commercial cases.

Customers here include the Inland Revenue, which is now required to show that it does not pursue claims without having regard to the cost to the tax-payer should its action be unsuccessful.

One of the reasons that Litcomp established Elite was to capitalise on the relationships that it had with solicitors through its original business, the provision of medical and psychological reports. Like another quoted company in this sector, Mobile Doctors (LON:MDG), Litcomp is essentially an intermediary, acquiring and vetting reports that assist solicitors in presenting their cases from a panel of around two thousand specialists.

This business suffered a hiccough in 2007 when insurers challenged the payment of the intermediaries’ fees but a judgement in the case of Wollard vs Fowler ruled against the insurers. So this business is now back on track and 35% of Elite’s business come from clients of its other division.

So this is a neat business model, and one that is delivering good results. Earlier this month shares in rival provider of medical reports, Mobile Doctors, were suspended pending the announcement of a deal with another private company that would double its size. This may have some impact on the competitive landscape of Litcomp, but even so the valuation of its shares is hardly demanding especially for a business that if anything tends to benefit from tough economic times.

Regards,

Tom Bulford
for The Penny Sleuth

Source: LitComp: One to Watch