General Motors Company (NYSE:GM) is an anomaly. At a time when the underlying industry struggles with the “peak auto” concept, the GM stock price is veritably soaring. A few days ago, shares hit an all-time record high (that is, post-government bailout). Should the formerly embattled company grab a few more dollars, it’ll reach levels previously thought unattainable in quick time frame.
Investors shouldn’t discount how remarkable the recent swing in GM stock really is.
Year-to-date, the automaker has gained almost 30%. Contrast that with the little-more-than 1% eked out by domestic rival Ford Motor Company (NYSE:F). Across the Pacific, Japanese stalwart Toyota Motor Corp (ADR) (NYSE:TM) is doing okay, up almost 6%. Honda Motor Co Ltd (ADR) (NYSE:HMC) is in similar trajectory to Toyota, while Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) has lost 3.3% YTD.
So is the comparatively mercurial rise in the GM stock price due to General Motors finding the magic formula? In some ways, yes. Prior to its third-quarter earnings report, Wall Street buzzed about the automaker’s progress towards autonomous vehicles. Deutsche Bank analyst Rod Lache forecast that GM-branded self-driving vehicles could be released within a few quarters.
As InvestorPlace writer William White explains, the implications are enormous. “The idea that General Motors Company will have its self-driving cars ready for commercial status in just a few quarters is astounding. Other companies working toward self-driving cars aren’t expecting them to be ready for a few more years.” (emphasis mine)
Naturally, the GM stock price popped on the Deutsche Bank report. When the company released its Q3 earnings, bullish investors felt further justified in their optimism. GM reported $1.32 earnings per share, which exceeded the Street’s $1.13 estimate, or a nearly 17% surprise. Additionally, GM management announced a quarterly stock dividend of 38 cents per share.
GM Stock is High on Speculation, Not Much Else
At this rate, General Motors is inside 10% of reaching a then-lofty $50 price target, a call made by Morgan Stanley analyst Adam Jonas back in July. To his credit, the GM stock price was, at that time, barely registering a profit. More impressively, Jonas affirmed that the target could be reached “soon.”
Jonas certainly nailed it. But as the old aphorism goes, even a blind squirrel finds a nut once in a while. Was the Morgan Stanley analyst fundamentally sound in his argument, or did he just get lucky?
While I admire the gutsy and, so far, correct call, I’m not about to jump on the bandwagon. While we can go into a litany of reasons, I’ll start off with the recent Q3 earnings report. Although GM stock exceeded consensus estimates, EPS lagged the year-ago quarter by 23%. Furthermore, this year’s Q3 revenue was $33.6 billion, a 13.6% decline from Q3 2016.
Slowing the sales growth was disappointing performance in the European and American markets. To be fair, the disappointment was expected, as the auto industry itself struggles with declining demand and rising inventories. Moreover, auto defaults are on the rise, indicating that many who currently buy cars can’t afford them.
The easy solution, of course, is China. But then, this would be an admission that General Motors can’t compete in its core markets. The automaker has to win big among Chinese consumers, and hope the hemorrhaging in the U.S. and Europe isn’t terrible. That’s not a confidence-inspiring message for those seeking to ride the GM stock price higher. Also, the Chinese auto market isn’t consistent, and it’s not growing like it used to.
GM Stock, Other Carmakers are Volatile and Risky
At the end of the day, I agree with our own Nicolas Chahine that the markets have gotten too overheated. Most of the good news has already been baked into the GM stock price. Assuming no other groundbreaking stories, shares will probably take a breather.
Now, I’m not saying that General Motors is necessarily a short candidate. Investors have plenty of reasons to like the automaker, the GM stock dividend being one of them. But at the same time, this is the brand that had to declare bankruptcy because nobody wanted their cars. Presently, GM has to sell cars where two out of three prime markets are bear markets.
Bulls can scream all they want about GM’s advantage in next-gen automotive technologies. Assuming it’s true, they still lack the verve that has made Tesla Inc (NASDAQ:TSLA) a crowd favorite. While General Motors has some bright spots, it also has liabilities. It’s a game of which one will show up to play harder. It also happens to be a game I’m not interested in playing; hence, I’ll pass on GM stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.