Tata Motors Stock – Is it Safe to Buy Now?

Tata Motors (NYSE: TTM) is making good on its promise to cut costs to improve profitability. Yesterday, Tata Motors announced that it is eliminating 4,500 jobs in its Jaguar Land Rover division in Europe. Its share price jumped 1% on the news, trading above $13.30 for the first time in three months.

Nobody likes cutting jobs. Human beings that rely on those paychecks for their livelihoods will be hurt. But sometimes a painful decision like this is necessary. Otherwise, the remaining 37,000 jobs would be lost if the company goes belly up.

Is Tata Motors Stock Worth Buying?

Is Tata Motors Stock Worth Buying?

In the bizarre world of the stock market, bad news like this was good news for shareholders of Tata Motors. Its stock has been on a long, gut-wrenching slide over the past eighteen months. Once trading above $40, Tata Motors fell below $11 last month after S&P Global Ratings reduced Tata’s credit rating.

However, Tata rallied above $13 over the past month as rumors of a possible job cut started making the rounds. Meanwhile, the SPDR S&P 500 ETF (ARCA: SPY) has gained 6% during the same time despite the recent stock market correction (see chart below).

Source: S&P Capital IQ

So, has Tata Motors finally bottomed out? Or is this bump just a brief respite before its share price starts heading back down? The financial reward for guessing correctly could be huge, as could the penalty for being wrong.

Yesterday, you could have bought a “LEAPS”, or long-term call option, on Tata Motors with a strike price of $15 that expires in one year for $2.50. If Tata continues to rally and is trading at $20 by the time that option expires then your return on investment would be 100%. But if Tata flounders and never gets back above $15 then you could lose everything.

Should You Buy Stock or Options in Tata Motors?

A return to $20 means that Tata’s share price would need to recover nearly 50% from where it is now. In that case, you may decide you’d rather own the stock in case its share price stalls out. That way, you might be able to recoup your original investment instead of risking losing it all.

I own Tata Motors in the PF Growth Portfolio as a play on the future growth in the middle-class populations of India (where Tata is domiciled) and China (whose moratorium on an import tariff on American made cars expires in at the end of March if no trade agreement is reached by then). I still believe I will turn out to correct about that, and today’s news may be a small step in the right direction.

My advice? If you don’t already own Tata Motors in your portfolio, then this is a good time to start buying it. With a troubled company like Tata Motors, usually the best time to buy is when bad news like today’s announcement is treated as good news.

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