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Trade of the Day: General Motors (GM)

The stock is supremely undervalued and presents a strong profit opportunity


General Motors (GM) needs no introduction as one of the largest car manufacturers on the planet, and it has certainly had its problems in recent months. While the company’s sales have been surging faster than domestic rival Ford (F), the fast money has poured into F and shunned GM. As a result, these shares looked undervalued even before the most recent recall announcements triggered a 10% decline. With the stock in technical rebound territory, I view GM as an interesting trade.

At current prices, GM presents both long-term value and a more immediate opportunity. Despite the obvious impact of $2.5 billion in recall costs so far this year, the underlying fundamentals here are still surprisingly robust. Various industry estimates indicate that GM sales are expanding at a rate of 10%-14%, much faster than its competitors in the United States, and outperformance in key foreign markets is even stronger.

Although recalls and legal provisions have gnawed on the bottom line, this is still a profitable industrial giant that is turning over close to $40 billion in quarterly sales. With management setting aside $400 million for crash lawsuits and another $900 million to handle potential recalls over the next decade, the balance sheet has already absorbed a vast amount of potential pain ahead. GM could face serious threats from here, but the cushion should keep the company vibrant in all but the worst scenarios.

In the meantime, the recent sell-off has turned GM into a company with a market cap of under $55 billion to cover an enterprise value of nearly $67 billion. Forward P/E is less than 7.5X expected 2015 earnings and when adjusted for growth, the multiple drops to an extremely attractive 0.76.

On a technical basis, GM is trading just above a reading of 30 on the relative strength index (RSI), which indicates that shares are just about oversold relative to the broad market. Since February, as recall after recall has been announced, whenever the RSI has flashed anything close to this kind of “oversold” signal, GM shares recovered an average of 10% over the next two to four weeks, making the odds of another technical relief rally too high to ignore.

Hilary Kramer is the editor of several financial advisory services designed to help individual investors profit from her stock picking talents — including Hilary Kramer’s GameChangersBreakout Stocks Under $10 and High Octane Trader.

Article printed from InvestorPlace Media,

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