The last two months — and the last two years, for that matter — have been tough ones to own General Motors Company (GM). GM stock is still down 13% year-to-date, even with the recent bounceback that got going in the middle of this month. And, GM shares are down a whopping 28% from their 2013 close, trailing the market’s decent performance for the time frame.
The prod for the weakness? Investors just never believed it would get past an armada of headwinds thrown its way, even while it was overcoming them.
In fact, General Motors is still a victim of severe doubts (albeit new ones).
Are the naysayers right, and they simply started their selling a bit too soon? Or has the market simply been wrong about GM for a long, long time?
If it’s the latter, GM stock is a screaming buy at this point.
What’s Working Against General Motors?
Take your pick of current reasons to bet against GM. Court cases stemming from its defective ignition switches are starting to make headlines, it recently announced it would be raising $2 billion via the sale of debt and the automaker is in the midst of another quality gaffe in the form of a 200,000-vehicle recall to fix faulty air bags.
Of all the reasons to steer clear of GM stock, however, the potential risk of a recession is being viewed as the biggest right now.
Morgan Stanley got that ball rolling earlier in the week when analyst Adam Jonas suggested neither GM nor rival carmaker Ford Motor Company (F) were respectful enough of the adverse impact a recession might have on their profitability.
Interestingly, Jonas added that he doesn’t expect the recession to materialize in the foreseeable future, making his concern moot.
It didn’t matter. The media and investors took the premise of the ball and ran with it, while other analysts fanned the bearish flames. For example, Credit Suisse downgraded Ford earlier in the week, suggesting that 2015’s peak numbers were going to be as good as things get for a while.
Though not specifically aimed at Ford or GM, Citi analysts pointed out just this week:
“The most recent deterioration in the global outlook is due to a moderate worsening in the prospects for the advanced economies, a large increase in the uncertainty about the advanced economies’ outlook (notably for the U.S.) and a tightening in financial conditions everywhere.”
Credit Suisse didn’t specifically cite an expectation of a recession either, but slowing growth is slowing growth no matter how you slice it. And if Ford Motors is hitting a headwind, then General Motors is as well. It’s not a stretch for shareholders in F and GM stock to connect the dots.
More Bark Than Bite Around General Motors
A funny thing happened on the way to walking over the edge of a cliff … nothing.
While all the concerns, impasses and threats are legitimate, they’re nothing new for General Motors. The analyst community was lukewarm — at best — on GM stock two years ago, with most analysts just a deeming it a buy (as opposed to a strong buy) and setting an average price target of $46 per share.
Click to Enlarge The number of strong buy ratings in the meantime has fallen by about a third, as has the number of buy ratings.
They’ve been offset with a more-than-doubling in the number of hold ratings. The target price has barely budged in the meantime.
Whether or not all that pessimism is mistaken remains to be seen. GM stock lost about a quarter of its value during that time, with investors expecting the other proverbial shoe to drop at any moment during that two-year stretch.
But, it never did. Revenues and pretax income have held steady from 2013 through 2015.
The end result is a stock with a trailing price-to-earnings ratio of 5 and a forward-looking P/E of 5.2 for an automotive company producing a fairly typical margin rate of around 5%. The results largely defied the critics, even if the stock didn’t.
Is it possible the sellers were simply two years too early, and now will be vindicated? Anything is possible. But, it’s worth noting that in spite of all the recent chatter about an economic slowdown taking hold, there’s very little empirical evidence that this is happening. Last month’s consumer spending grew at its fastest pace in several months, and last quarter’s second GDP reading indicated growth of 1% rather than the initially expected 0.4% improvement.
Underscoring this broad economic strength is the fact that when the energy sector’s woes are stripped out of the results, last quarter’s earnings and revenue for the S&P 500 actually indicated respectable growth, further calling into question the recent recession rhetoric.
Bottom Line for GM Stock
The good news is, in light of the reasonable assumption that 2016 isn’t going to dish out a recession, General Motors shares are undervalued employees for growth. Indeed, they may already be fairly priced for a recession if that’s what’s in the cards.
The bad news is, until the majority of investors actually start to believe that GM isn’t going to hit a wall soon, the value argument is irrelevant. The market is going to keep GM stock at bay because of an idea rather than reality.
Either way, in case the worst-case scenario is already baked in, GM currently offers more upside than downside.
Just be prepared for a long, volatile battle if you wade in. It’s going to take a while for the masses to come around.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
