GM Stock Is a Mixed Bag

Investors who buy GM stock shouldn't have high expectations

By Bret Kenwell, InvestorPlace Contributor

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Shares of General Motors (NYSE:GM) — and automakers in general — have been rebounding in recent weeks. But before this rally, GM stock and others had been under immense pressure. There were varying reasons for their decline. Is this a good time for investors to start buying auto stocks?

Perhaps it is, since their valuations are dirt cheap and their dividend yields are high. That’s true of General Motors stock, Ford (NYSE:F), Daimler (OTCMKTS:DDAIF), Fiat Chrysler (NYSE:FCAU), and many others.

Unfortunately, that’s more or less always been the case. It’s hard to imagine that situation ever changing. So investors have to ask themselves if they’re content with little to no capital appreciation and a sizable dividend yield.

Of course, that doesn’t mean auto stocks won’t rise at all. After all, GM stock has jumped meaningfully over the past few weeks. But if investors’ expectations are dialed back, then they won’t be disappointed. Because just a few weeks ago, GM stock price was barely in positive territory for the last five years, and Wall Street has refused to assign any sort of premium to the stock.

Should You Buy GM Stock?

All that said, I don’t hate General Motors stock, not by a long shot. The shares trade at just 5.7 times this year’s expected earnings and pay out a 4.2% dividend yield. In August 2016, the company acquired autonomous driving innovator Cruise Automation for a reported $1 billion. After SoftBank and Honda Motor (NYSE:HMC) invested in the unit, it’s now being valued at more than $14.5 billion.

While GM no longer owns all of Cruise, its investment in the unit has grown considerably in just two years. It’s also clear that GM has a plan for the upcoming changes in vehicles, whereas its competition like Ford doesn’t seem to be as well-prepared.

The strong U.S. economy is helping drive average transaction prices higher, but the number of autos sold continues to stagnate. For the year, analysts expect GM’s revenue to decline 20 basis points, or 0.2 percentage points, while 2019 expectations call for a sub-1% increase. GM’s revenue growth is not its main attraction.

The larger concern is the company’s 2019 outlook. Next year, the company’s profits are expected to decline 7.5%, following this year’s decline of roughly 5%. However, GM obliterated expectations for Q3, reporting earnings per share of $1.75 vs expectations of $1.29.

Assuming analysts’ 2019 projections are correct, the price-earnings ratio of GM stock will rise after its earnings fall, assuming that GM stock price remains at current levels. If the price-earnings ratio doesn’t increase, GM stock price will have fallen. Furthermore, if this is how General Motors stock is performing when the economy is strong, what will happen when a recession arrives?

I think that’s what so many investors are worried about. GM stock may still trade at five times its earnings, but if its earnings decline by 50% during a recession, GM stock will get hammered. Furthermore, rising interest rates won’t enhance the affordability of the company’s vehicles.

All that said, we’re not in a recession and GM is doing well enough. CEO Mary Barra is positioning GM for the long term, but there will be bumps in the road. GM stock is not for everyone, but it does have some positive attributes.

Trading GM Stockchart of GM stock price.

So what do the charts say?

The shares are struggling against the backside of their long-term uptrend support, which is depicted by the blue line. Just overhead is also the 50-week moving average, which won’t help matters. Above that point, GM stock can retest the $40 level.

But if it fails to surpass that mark, General Motors stock price will need to stay above the ten-week moving average and the (not shown) 50-day moving average at $34. If GM stock fails to stay above $34, we’ll likely see the 200-week moving average again and the recent lows below $31 could be reached.

The charts for GM stock are starting to become clearer, but they are far from great. If GM drops back below $34, however, all bets are off.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GM.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/buy-gm-stock-for-dividend-yield/.

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