GM Stock Rallies as Shocking Sales Gain Trumps Recall News

by Dan Burrows | July 1, 2014 11:39 am

General Motors (GM[1]) is recalling millions of more vehicles and booking more than a billion dollars in charges in this quarter alone — and yet GM stock is rallying.

Why?

Because GM is still selling more cars.

Incredible as it may seem, GM added another 8.5 million vehicles to its roster of recalls late Monday. We’re not even halfway through the year and GM has now recalled 29 million cars and trucks in North America alone. That’s more than GM’s combined U.S. sales from from 2005 to 2013, notes[2] The Wall Street Journal.

As for the bloodless business of accounting, GM raised its projected charge to earnings by $500 million — up to $1.2 billion for the current quarter.

But at the opening bell, GM stock popped by more than 1%.

The catalyst for the move in GM stock was the latest monthly sales figures. As bad as the headlines have been, GM’s June U.S. sales rose 1% year-over-year to more than 276,000 vehicles. True, that’s a huge letdown from May when GM sales jumped 13%, giving General Motors its briskest month of business since August 2008 — but it absolutely crushed market expectations. Analysts figured GM’s June sales would plunge 6.3%.

As GM said in a press release:

“June was the third very strong month in a row for GM, with every brand up on a selling-day adjusted basis. In fact, the first half of the year was our best retail sales performance since 2008, driven by an outstanding second quarter.”

GM Stock: Revenue Matters, Not Recalls

The bottom line is that GM’s business is strong, despite the recall news. It’s bizarre, but true. Hey, with so many automakers issuing recalls so often — Nissan (NSANY[3]), Toyota (TM[4]) and Ford (F[5]) have also issued recalls this year — maybe car buyers have just come to expect them.

At any rate, as we wrote a month ago, trading GM stock on the recall news[6] has been a losing proposition. GM stock is still off 9.5% in 2014, but anyone who sold at the point of maximum pessimism did so when when GM stock was down 22% for the year-to-date.

Oh, and anyone who timed the year-to-date bottom in GM stock is now sitting on a gain of more than 16%.

That’s how it goes with headline risk. Pulling the trigger on bad news is usually a bad idea, because the market almost always overreacts.

Indeed, you’re supposed to buy on bad news, remember? The Gulf oil spill really was a catastrophe, but BP (BP[7]) stock went on to rally 60% in sixth months after bottoming out. Shares in JPMorgan Chase (JPM[8]) turned out to be a steal when they sold off on the London Whale trading debacle.

No, you can’t time an individual security like GM stock any more than you can time the market. But you can keep your cool, and that’s the best trading and investing strategy of all.

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

Source URL: https://investorplace.com/2014/07/gm-stock-general-motors-recall-2/

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