The good news keeps rolling in for General Motors (GM). Not only did the GM recall fail to hurt sales of General Motors cars, but now an internal investigation is set to clear top executives of a coverup over faulty ignition switches linked to at least 13 deaths.
The recent saga of GM stock is a good example of the folly of selling shares on headline risk. Fueled by a frenzied media paid to catastrophize events, the market tends to panic over bad news, beating down stocks well beyond the level necessary to discount any actual risk to earnings.
Although there’s no doubt the GM recall looked like a disaster for results — and a scandal for senior management — it turned out to be something far less. After all, GM sales jumped 13% in May, giving General Motors its briskest month of business since August 2008.
That’s right: General Motors recalled nearly 13 million cars around the world for a problem it had known about for years and may have contributed to the deaths of more than a dozen people … and car buyers don’t care.
As for clearing GM executives of a coverup … well, it’s never good to have uncertainty hanging over the fate of a company’s management team or its CEO, but that wasn’t going to be a death knell for GM stock. CEOs are replaceable. Getting global car buyers to trust your brand after selling faulty, possibly deadly merchandise is a problem of another order.
As ugly as things may be internally at General Motors — and the internal investigation reveals serious dysfunction — the bottom line is that sales are strong. With so many automakers issuing recalls so often — Nissan (NSANY), Toyota (TM) and Ford (F) have also issued recalls this year — car buyers seem to have become inured to them.
GM Stock: A Rough Ride Even Before the Recall
It’s not that the recall and investigation aren’t serious problems and risks for GM stock, only that the market overreacted — something you can almost always count on when it comes to headline risk.
At one point, GM stock was down as much as 20% for the year-to-date because of the recall news. Investors who panicked during that time sold well below current levels and forfeited any chance for relief.
Opportunistic buyers, on the other hand, are looking at handsome gains. GM stock is up more than 15% from its recent trough.
The key to dealing with headline risk is to remember that the market almost always reacts irrationally. The Gulf oil spill really was a catastrophe, but it was also a great time to buy BP (BP) stock, at least for a trade. It rallied 60% in sixth months after bottoming out. And shares in JPMorgan Chase (JPM) were a steal when they sold off on the London Whale trading debacle.
Of course, you can’t time a stock any more than you can time the market. That’s why the best advice — as always — is to stay frosty.
Sure, GM stock is still off about 10% so far this year, but it has also clawed back half of its YTD losses already. And, for what it’s worth, GM stock is still up more than 6% from its IPO after being down as much as 45% just two years ago.
The recall news has been a drag on GM stock, but investors have been through worse. And, hey — no one said it would be a smooth ride.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.