General Motors: Time to Test Drive GM Stock

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General Motors (GM) is revving up value for investors. And for those willing to take a test drive before purchasing, an out-of-the-money bull put spread in GM stock is one smart place to park.

General Motors Company: Time to Test Drive GM Stock

Investors hit the brakes and reversed an early bid Wednesday morning on GM stock, but value, more than ever, is apparent for shareholders of General Motors.

An opening gap gainer of about 7% at Wednesday’s highs was tied to a trifecta of very strong supports for GM stock going forward.

First, management at General Motors delivered upwardly revised and above-expected guidance for GM stock.

For its fiscal full-year, the company expects profits of $5.25 to $5.75 compared to a prior range of $5 to $5.50 and Street estimates of $5.41 per share of GM stock.

This profit midpoint translates into a historically cheap price-to-earnings multiple of around 6 for GM stock, which, mind you, also fails to consider GM’s dividend.

Secondly, speaking of shareholder payouts, GM raised its quarterly dividend by 6% to 38 cents per share of GM stock.

The raise puts GM stock’s yearly dividend yield at a very attractive and above-market 5% which looks sustainable given a payout ratio of just 48% and GM’s overall healthy balance sheet as supports.

Lastly, GM announced the company is increasing its stock buyback initiative by $4 billion or 80% to total $9 billion or nearly 19% of GM stock’s current market capitalization.

GM Stock Monthly Chart

011316-gm-weekly-stock-chart
Click to Enlarge
Source: Charts by TradingView

This trader can appreciate how a downtrend such as the one currently plastered on the provided weekly GM stock chart may seem technically ominous.

But in the realm of value investing and where fundamental supports have been delivered on a silver platter, GM stock near $30.50 may as well have a big ol’ bow gift-wrapped around it.

Having said that — and not being naïve to the whims of a market that likes to overshoot — an even more slippery environment could always put pressure on GM stock to skid lower.

My estimate, barring an extreme move in the S&P 500 convincingly below the Aug. 24 mini flash crash low would be an approximate 10% floor in the $25 – $28 area for GM stock.

GM Stock Bull Put Spread Strategy

Reviewing the GM stock options board and looking for ideas worthy of a test drive given our assessment of current conditions; the February $28/$27 put spread for a credit of 15 cents or better is attractive.

The limited-risk spread allows for the credit to be collected should GM stock remain above $28 at expiration. That allows for shares to pull in about 8% from current levels before shares of GM threaten the breakeven of $27.85.

What’s also of interest is the risk of just 85 cents in this GM stock vertical.

For deep-value investors, should GM stock hypothetically crash lower — to $25, for instance — and to the low of our estimated value band, he or she could take hold of GM at an effective price of $25.75 through assignment and closing of the long put.

At that point, the investor has gone from taking a modest test drive to making a very nice purchase, all things considered.

Investment accounts under Christopher Tyler’s management are currently long GM stock and its derivatives as part of a hedged core holding. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/general-motors-time-test-drive-gm-stock/.

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