GM Returns to S&P 500: A Symbolic Victory, But Not Much Else

Index-fund buying won't solve General Motors' sluggishness

   

What a short, strange trip it’s been.

Four years after bankruptcy, a $50 billion government bailout and expulsion from the U.S. stock market’s benchmark index, General Motors (GM) is set to rejoin the S&P 500.

GM will be added to the S&P 500 and S&P 100 after the close of trading Thursday, replacing H.J. Heinz (HNZ), which is being bought out by Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) and private equity firm 3G Capital.

It’s a huge symbolic victory for GM, the world’s second-largest automaker, and should also provide a solid, albeit brief, tailwind for the stock.

But that’s about it.

Inclusion in the S&P 500 creates automatic demand for GM shares because every indexed mutual fund and exchange-traded fund tracking the benchmark now has to buy the stock.

That explains why news of the inclusion sparked a nice pop in GM shares Tuesday. Traders looking to front-run demand from indexed products helped the stock jump more than 3% after the opening bell on heavy volume. The broader market was up just a fraction of a percentage point at the same time.

And, yes, a once-unthinkable comeback now looks to be complete. GM, a storied manufacturer with a history dating back to 1908, was mocked as “Government Motors” when the Treasury stepped in to keep it alive. Now it’s going to reclaim its place in the benchmark index for U.S. equity performance.

But it’s still been a dog of a stock.

GM might have a new cost structure and stock listing, but it hasn’t been much of a holding since going public at $35 at the end of 2010. Heck, Tuesday’s rally served only to push the stock back up to breakeven from its initial pricing.

Indeed, except for a brief period in the early going, GM has been a total dud — a stock good for tax-loss harvesting and not much else (chart courtesy of S&P Capital IQ):

GM CHART GM Returns to S&P 500: A Symbolic Victory, But Not Much Else

Demand from S&P 500 index funds should offer a short-term downside cushion, but when it comes to fundamentals — that is, demand for GM vehicles — the company looks to be running out of gas.

True, U.S. vehicle sales came roaring back in May. Automakers moved more than 1.4 million vehicles last month, good for an 8.2% gain year-over-year. But before we make too much of the news, realize that the sales figures represented only a return to levels hit in January.

In other words, we’re back at 2013′s starting line.

Furthermore, GM’s results came in well below the industrywide average. The biggest U.S. automaker posted a 3.1% sales gain vs. a year ago — a huge disappointment compared with other manufacturers.

Ford (F) said sales jumped 14% in May vs. a year ago. Chrysler — owned by Italy’s Fiat (FIATY) — reported an 11% gain. Nissan‘s (NSANY) sales increased 25%, while Honda (HMC) posted a 4.5% gain.

Only Toyota (TM) — the world’s No. 1 manufacturer — fared worse than GM, reporting a sales increase of just 2.5%.

Symbolically, it’s a big deal for GM to be back in the S&P 500. It’s a hell of a feel-good story to have such a quintessentially American company come back from near death.

But it will take a lot more than index-fund buying to make GM shares a profitable long-term investment. After all, a return to the S&P 500 doesn’t mean jack to new-car buyers.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/06/gm-returns-to-sp-500-a-symbolic-victory-but-not-much-else/.

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