Maybe it’s because General Motors Company (GM) went bankrupt almost seven years ago or had the more recent recall disaster, but GM stock doesn’t get enough respect.
After all, GM stock is down 15% for the year-to-date and 22% over the past 52 weeks, even as the automaker generated record sales and profits. Meanwhile, the company’s outlook is more than fine, and shares are cheap.
Perhaps most enticing of all, the yield on the General Motors dividend is up to 5.24%, and the payout is reliable. However, value buyers aren’t stepping in to the point that GM stock’s price reflects its prospects.
True, macroeconomic worries abound, particularly for China. But General Motors isn’t reporting any trouble in the giant market. China has actually been a big driver of growth for the automaker.
General Motors set a January delivery record for China. Retail sales rose 7.3% year-over-year, driven by luxury nameplates and SUVs.
Cadillac sales grew 16% to notch a sixth straight month of double-digit growth. At the same time, Buick sales hit an all-time monthly high and SUV sales nearly tripled.
The Chinese economy and stock market might be down, and the dollar may be up, but General Motors has shrugged it all off.
GM Stock Supported by U.S Sales Too
Meanwhile, the critical U.S. market is pulling its weight. January deliveries rose just 0.5% last month but sales rose a solid 9%.
The bottom line is that demand for SUVs, pickup trucks and luxury vehicles in the U.S. and China is more than offsetting weakness pretty much everywhere else. The outlook for these two critical markets remains positive, and that should drive double-digit earnings-per-share growth.
And still GM stock gets little love. Sometimes a stock is cheap for a good reason, but that’s not the case here. Some may fear a value trap, but the way businesses is running, this pick looks more like a bargain.
GM stock trades at only five times forward earnings, yet the Street expects earnings to deliver a long-term annual growth rate of 20%.
No wonder Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) owns nearly $1.5 billion in GM stock, good for more than 3% of the company’s portfolio.
As compelling as General Motors looks at current levels, though, don’t be surprised if it remains a frustrating investment. Whatever the reason, the market is still reluctant to give this name the benefit of the doubt.
However, if General Motors remains on track, you can bet that sentiment will come around. Be patient and this value play will eventually pay off.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned shares.
