Profiting From Toyota's Deceleration

-- By Dr. Melvin Pasternak

Just when it seemed the auto industry was beginning to rebound, Toyota Motor Corp. (NYSE: TM) has gone into reverse.

Toyota -- the world's number one selling auto manufacturer -- recently recalled 2.3 million cars in the United States, due to faulty floor mats which trap accelerator pedals and cause sudden and unexpected acceleration. The 2.3 million vehicle recall came on top of a recall of 4.3 million vehicles in October.

While Toyota is working on a solution with its supplier, the company has also halted production in six of its North American manufacturing plants. As well, it is suspending sales on eight of its most popular vehicles, including the Camry and Corolla -- which accounted for 57% of U.S. sales last year.

The news is having a devastating effect on the reputation of the Japanese company. Even after the problem is fixed and production resumes, trust will be difficult to restore. This can affect both sales and profits.

Traders have already voted -- with their feet, so to speak. The stock lost nearly $7 on Wednesday, January 27th. Volume was 3.48 million shares, about four times normal levels. On Thursday, the stock tried to rally, but gave up its gains.

As the chart below shows, Toyota's peak of $91.97 hit on January 19th may mark a major top. First that is the level where a major downtrend line intersects the chart. Toyota has failed at a crucial technical juncture.

Second, there is a shelf of resistance at this same level dating back to August through October 2008. TM's failure to penetrate this resistance is a second technical failure.

This week's large bearish engulfing candle means the stock has penetrated both its 10- and 30-week moving averages.

From a technical standpoint, Toyota is likely to continue falling for several more dollars until it hits support at around $72. Another ledge of support exists near $70 as well.

However, if the company is not able to find a quick fix for the accelerator pedal defect -- and continues to suspend manufacturing and sales as a result -- an accelerated downtrend could result.

In that case, TM could go as low as the mid-50s before finding support. The mid-50s is a major support zone for the stock and an area in which it formed a triple bottom between September of 2008 and April of 2009.

   RSI, stochastics and MACD have all recently given sell signals. All show that Toyota is not yet oversold.

Fundamentally, Toyota like other car companies has been under pressure.

   Between fiscal year 2008 and 2009, revenue dropped nearly -26%, from $262 billion to $208 billion. In 2010 revenues are expected to take another huge hit, declining to $157 billion, a drop of more than -25%.

Sales aren't expected to climb back up until 2011 when analysts anticipate revenue will increase to $259 billion.

Earnings have fared little better. Toyota's 2008 earnings per share were $5.40. In 2009, analysts expect the company to lose $1.39. The company still won't be in the black in 2010 when it is projected to lose $0.29 a share.

In 2011, analysts expect an earnings recovery. They anticipate Toyota will earn $3.20 a share. At current levels, the 2011 forward price to earnings (P/E) ratio is over 25.11. In other words, the company is not cheap.

   The price to sales ratio suggests Toyota is not cheap either. Ford (NYSE: F), which is expected to be profitable in 2010, has a price to sales ratio of 0.33. In contrast, Toyota's is more than double that at 0.73.

The gap on the daily chart between January 26th and January 27th stretches between $81.43 and $86.78. If it is indeed a breakaway gap, it should not be filled. My hunch is Toyota will find temporary support between $70 and $73 and then continue lower.

My target is $65.05 in the middle of a consolidation zone. The stop loss is $83.05. If my target is reached, I will make $11.95 from current levels. If the stop loss is touched, I will lose $6.05 from current prices. That gives me a risk reward ratio of 1.98 to 1.

To learn more how you can profit from my trading suggestions, you will soon be able to subscribe to my newsletter Double-Digit Trading. In this week's issue, I recommend buying a master limited partnership (MLP) and shorting a beverage company that could bring you strong double-digit gains.

(All security prices listed in this newsletter are as of the close of trading on January 29, 2010.)

I entered a position in Quicksilver Gas Services (NYSE: KGS) at the open on Tuesday, December 8th at $22.05. A few days later, KGS issued additional shares to buy assets from its parent company, a development which seems to have taken the market by surprise. The shares are slightly below the rising 50-day moving average and are approaching oversold territory. My stop loss remains steady at $19.45.

I bought Amdocs (NYSE: DOX) as a Trade of the Week holding on Monday, December 21st at $27.73. On January 21st DOX was upgraded by an analyst who raised his price target from $28 to $37. The stock gapped up and briefly went above $30. The shares are holding very well on this market correction so far, staying above a rising 50-day moving average. My stop loss at $24.65 and target of $33.95 are steady.

The Herbalife (NYSE: HLF) trade was opened on Monday, January 5th at $41.55. The stock went to just over $45 before retreating. The shares broke important psychological support at $40 on Friday, January 29th, and are approaching my $37.95 stop loss.

We entered a position in AllianceBernstein Holdings (NYSE: AB) on Monday, January 11th at the opening price of $29.39. The shares challenged resistance at $30 before backing off. On Friday, the stock tested but did not break my stop loss point at $25.49.

Morgan Stanley Municipal Securities (NYSE: IQM) was first bought on December 8th at $13.11. The basis of this trade was muni-bond funds having a strong seasonal pattern of bottoming in October-December and rallying into mid-February. IQM is holding extremely well in a declining market and is above a rising 50-day moving average. My target and stop loss are steady.

I entered a position in Tech Data Corp. (Nasdaq: TECD) at $45.54 on January 19th. The shares made it very close to $47 but have since declined precipitously with the overall market. I was stopped out at $42.45 on Wednesday, January 27th for a -6.8% percentage loss. This position is now closed.

Thanks for reading the latest update on my open trading positions.

Important Note: If you enjoy my Trade of the Week picks and want more, I'd like to invite you to check out my own premium service, Double-Digit Trading. I just sent my second issue where I profiled a master limited partnership that's come back from the dead and could deliver +31% to traders.
 

Melvin Pasternak -- Dr. Melvin Pasternak Co-Editor, Trade of the Week

Note: Mike Turner will return with a new "Trade of the Week" next week.  In the meantime, below you'll find the latest update on his open trading positions...

(All security prices listed in this newsletter are as of the close of trading on January 29, 2010.)

We stopped out of Cognizant Technology Solutions Corp (Nasdaq: CTSH) for a gain of +8.2%. We also stopped out of Celanese Corporation (NYSE: CE) with a loss of -6.7%.

Pengrowth Energy Trust (NYSE: PGH) declared a 6.6 cent dividend on the 28th. I lowered the basis in the trade, accordingly. No other action is recommended.

SPDR Gold Trust (NYSE: GLD) is down a bit and although I believe gold will recover in about three weeks, I am not willing to hold on to this trade if it moves much lower. As such, I have raised the stop on this ETF.

Thanks for reading the latest update on my open trading positions.
 

Mike Turner -- Mike Turner Co-Editor, Trade of the Week