Editor’s note: This column is part of our Best Stocks for 2017 contest. Charles Sizemore’s pick for the contest is General Motors Company (NYSE:GM).
As I’m writing this, we still have a few weeks left in 2016, and I’m duking it out for first place in the Best Stocks for 2016 contest with Jason Moser. His pick — mortgage processor Ellie Mae Inc (NYSE:ELLI) — has a slight edge on mine — pipeline operator Energy Transfer Equity LP (NYSE:ETE). But it’s a close race, and anything can happen. So may the best stock win!
As we start 2017, we’re in a very different type of market. This time last year, stocks were in freefall, and energy stocks in particular were in full-blown panic mode.
Nerve-wracking, “blood-in-the-streets” markets like those are the kinds of markets I live for. I lost clients in December and January, but frankly, I didn’t mind. Those who stuck with me ended up enjoying a fantastic year in 2016 when the market turned up again.
Well, a year later, things are vastly different. We’re entering the year with investors feeling downright euphoric … and that makes me nervous. I’m sitting on cash positions of 15%-20% in most of my stock portfolios.
But there is one pocket of the market that I still consider massively and unambiguously cheap — automakers. So even if this stock rally fizzles in 2017, I think it’s likely that the automakers finish the year with a respectable return.
So with no further ado, my pick for InvestorPlace’s Best Stocks for 2017 is General Motors Company (NYSE:GM).
The Case for GM Stock
I currently own General Motors in my Dividend Growth portfolio … which is something that I would have considered preposterous for most of my career. After all, for as long as I could remember, automakers were perpetually in and out of crisis, over-indebted and facing industry overcapacity and a militant, unionized workforce that took most of the profits.
Well, given that GM trades for 4 times trailing earnings and 7 times expected 2017 earnings, those are precisely the assumptions still baked into stock prices. GM is priced like a company with several structural problems facing a total collapse of profitability. But the reality is a lot different, and herein lies our opportunity.
Let’s start with debt. As of last quarter, GM stock had $79 billion in long-term debt and another $21 billion in unfunded pension liabilities. Offsetting that is about $22 billion in cash and marketable securities for a net debt of about $78 billion.
That might sound like a lot, but this is a company that has done $162 billion in sales over the trailing 12 months and $14 billion in profits. That’s a manageable amount of debt, even if sales moderate.
But here’s the thing: I don’t expect sales to slow all that much in the coming years, even if we have a mild recession. Remember, auto sales went into deep freeze during the 2008 meltdown, and a lot of the strong sales of the past few years has been catch-up buying.
And I think that trend has a lot further to go. The age of the average car on American roads is now 12 years. That’s not the average age before a car goes to the scrap heap … it’s the age of cars still on the road. Now, cars are built better than they used to be and can last a lot longer. But at some point, they get retired. And given the number of aging jalopies on the road, replacement sales should be quite strong over the next several years.
What this means is that the cyclicality that has given the industry fits over the years shouldn’t be nearly as bad going forward.
I expect General Motors to roll over the competition this year. But let’s say I’m wrong and GM’s stock price sputters. What’s the downside?
Well, one of the problems with value investing is that a cheap stock can stay cheap for a long time. I’ve been long GM stock and rival Ford Motor Company (NYSE:F) for close to a year now, and the stock prices have barely budged.
But when you buy a stock paying a dividend over 4%, you can afford to be patient and wait. And I should emphasize that I expect that dividend to be safe for the foreseeable future. GM is paying out just 17% of its profits as dividends, meaning that it could have several lean years of profitability and still safely pay its dividend.
I like to define risk the way the legendary Benjamin Graham did — not as short-term volatility but rather as the possibility of permanent or very long-term loss. And in buying GM at today’s prices, I would put our risk at close to nil. And if I’m wrong on the precise timing, I’m comfortable collecting the dividend indefinitely until I’m either proven right or something fundamentally changes my mind about the company’s prospects.
Best of luck to the other contestants … and may the best stock win!
Charles Sizemore is the principal of Sizemore Capital Management, an investments firm based in Dallas, Texas. As of this writing, he was long GM and F stock.