Many investors say that you “shouldn’t try to catch a falling knife.” 

Well, I did, and it hurts. 

I made a big, bold $12,500 bet on Ford Motor (NYSE: F) when I launched my $100,000 Real-Money Portfolio late last year and am now paying the price with a 16% loss thus far in 2012. 

Six months ago, I suggested that shares were now too cheap and significant upside is ahead. Yet I broke a cardinal rule of bottom-fishing: Buy stocks only after it appears as if the downside risk to earnings estimates has been removed, and forward estimates are likely to be stable or even rise.

Yet Ford’s announcement last week that international operations worsened in the second quarter, from an already dismal performance in the prior recent quarters, tells you that it was simply too early to buy this stock. 

I had been sitting on a decent gain with Ford, but am now underwater. The fact that Ford is likely to lose more than $500 million in foreign operations — in the second quarter alone — is an event I simply did not anticipate when the year began.

The key question is: would I buy this stock now with fresh money? Normally, that answer would be no. As noted above, Ford’s international operations are so weak that there is a real possibility the second half of 2012 brings even lower earnings forecasts. And if that were the case, I’d be selling my current holding in this stock.

But I’m not a seller. That’s because earnings pressure may not be as great as many fear. After all, Ford is very profitable in North America and should do even better in the quarters ahead as the company’s new Escape SUV and new Fusion sedan hit showrooms this summer and fall (early reviews in car magazines are extremely favorable). More to the point, this stock is very, very inexpensive.

How big a hit?
To say that Ford is profitable in North America and unprofitable everywhere else might give the impression of a company operating close to break-even. Yet the truth is that Ford, as a whole, remains nicely profitable. And as I’ve noted before, it sports a super-strong balance sheet. A quick look at revised earnings estimates does not paint a picture of distress.

We can assume that analysts at UBS are overly aggressive. They have lowered their profit forecasts but remain among the most bullish on the Street. I think it’s wise to focus on Citigroup’s view, which is the most conservative in this group. After last week’s drop, shares now trade for around six times Citigroup’s projected 2013 profits and around five times 2014 projections. Those multiples drop below four when looking at EBITDA (on an enterprise value basis).

Meanwhile, despite major troubles in foreign markets, Ford remains as a cash-producing machine. As a result, analysts think Ford’s debt will remain constant at around $12 billion, but cash should rise from $23 billion at the end of this year to around $31.5 billion by the end of 2014. With shares currently in the doghouse, management would be wise to put a lot of that cash into a stock buyback. It will be interesting to see how management addresses this issue on the upcoming second quarter conference call.

Risks to Consider: U.S. operations remain quite resilient, but a recession in the United States could lead estimates to come down even more.

Action to Take –> Nothing has shaken my faith that Ford may be capable of earnings approaching $3 per share by mid-decade, which in turn would push this stock up toward $20. In effect, value investors with a two-year time horizon should still be able to double their money with this beaten-down American icon.

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