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Gut Check Time for Auto Investors

As auto stocks plunge along with the rest of the stock market, many investors are facing a dilemma. How long do they hold onto stocks that could go dramatically lower? And if they don't sell, how long will it take for those stocks to rebound and hit levels many once thought to be reasonable price targets.

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It's not an easy call. But unlike late 2008 when the auto stocks plunged, this sell-off is far different. This time around, nobody is pricing in the possibility of bankruptcies. No, this time around there are two big questions: Do sales estimates need to be reduced? How far will the auto stocks slide in a recession?

On the first question, the consensus on what to expect for auto sales this year are pulling back a bit. While Ford and GM are both officially saying they expect industry sales this year between 13 and 13.5 million vehicles, there are others who say the industry won't reach 13 million vehicles this year. Last week Chrysler CEO Sergio Marchionne said he expects the industry sales to end the year at 12.7 million.

AutoNation CEO Mike Jackson has long said that we should expect a rate of between 12.5 and 13 million.

What's noteworthy is that nobody is calling for sales to fall off a cliff, even as the economy stumbles. In fact, when I talk with dealers, they're seeing the same level of traffic and sales even as the market tumbles and consumer confidence takes a hit.

Still, what do you do if you are an investor who has watched shares of Ford go from a 52 week high of $18.37 in February down to just over $10 this week?

Ultimately, the decision comes down to your time horizon. Still, many investors are now asking themselves, how low could these stocks drop if we dip back into a recession? Morgan Stanley estimates Ford shares could fall as low as $6 a share. GM, in the opinion of Morgan Stanley, could fall all the way to $10 a share.

Those are some scary projections if you bought either of those stocks in the last six months. On the other hand, analysts note that GM and Ford both have strong balance sheets with an ample amount of cash on hand to ride out a downturn. And if the economy stabilizes, or even improves, the upside for the auto stocks is substantial, especially as the industry looks to ramp up sales in 2012 and 2013.

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