Shareholders in General Motors (NYSE:GM) stock have not had a good year so far. In 2020, GM stock is down over 18%, flirting with bear-market territory.
Recent research led by Isaac Wanasika of University of Northern Colorado highlights, “Since incorporation in 1908, General Motors Corporation (GM) had developed iconic cars on US highways including the Cadillac, Corvette, El Camino, Malibu, and Camaro. Over the years, GM along with the automobile industry had overcome major financial, engineering, and ethical challenges.”
For car makers, 2020 will be possibly be remembered for economic challenges posed by the Covid-19 pandemic as well as investors’ interest in shares of electric vehicle (EV) makers. Amid the volatility in broader markets, market participants wonder if General Motor shares will soon be able to go and stay over $30. In the coming weeks, I expect short-term profit-taking to put pressure on GM stock and push it toward the $27.5- or even $25-level, which would give long-term investors a better entry point into the company. Here’s why.
How Q2 Earnings Came
On July 29, General Motors announced second-quarter results. Revenue of $16.8 billion meant a more than 53% drop from $36.1 billion a year-ago. The car maker lost $806 million, which is a sharp contrast to the $2.42 billion made a year ago. On an adjusted basis, the company lost 50 cents a share. Yet, the loss was not as wide as feared by investors. During the quarter, the company burned through $7.8 billion in cash.
Management noted that Chevrolet Silverado and GMC Sierra sales were strong, leading to U.S. market share growth YoY. Its performance in China also improved on a sequential basis from the first quarter.
GM’s CFO at the time, Dhivya Suryadevara, highlighted that that due to various lockdowns and factory closures, during the quarter, the company lost 8 out of 13 weeks of production in the U.S., which adversely affected the results. It almost broke even in North America, where it lost $101 million. That number was a lot different than the $3 billion profit made a year earlier. She also discussed various cost-cutting measures. I’d like to note that she has since left GM to join online payments company Stripe.
The group had already suspended its guidance for the year in the previous quarter. It did not release new guidance for 2020, either. On July 29, prior to the release of the quarterly statement, GM stock closed at $25.89. Later on July 31, it saw an intraday low of $24.44. Now the stock is shy of $30.
What To Expect From GM Stock in Late 2020?
GM stock’s 52-week range has been $14.33-$$39.78. The shares have more than doubled from their March lows. Yet they are well below their 2019 highs. In fact, in 2018, they were over $45.
Thus, long-term shareholders have yet to be rewarded for their patience. Many realize that unless the economic backdrop improves in the rest of the year, overall auto sales for most car makers are not likely to increase much. Put another way, GM stock would need a positive outlook for especially the U.S. economy to make new highs in the coming quarters.
On the more positive front, Q2 results showed that GM is still strong in its truck and SUV businesses. Over the past several years, it has also been building its electric vehicles business. Although that operation is loss-making at this point, analysts highlight the rapid growth. GM’s efforts in the EV space may not yet look as hot as Tesla’s (NASDAQ:TSLA). However, management’s work is significant and is likely to yield results in the new decade. In fact, recent weeks have seen speculation that GM may spin off its EV business, which would mean significant value for shareholders.
GM believes “Self-driving vehicles are one of the greatest engineering challenges of our generation. The potential to save millions of lives, reshape our cities, give people more time, and restore freedom of movement for many motivates our teams at Cruise everyday.”
Therefore, despite short-term headwinds due to economic uncertainty, the company’s “Next-Gen” vehicles will likely help the GM stock cruise higher in the next few years.
The Bottom Line
General Motors holds an iconic place in our industrial history, as well as US competitiveness and economic growth. The company has been through many challenges before. Thus, I’d not be willing to bet against the fortunes of GM stock.
However, the risk of further economic contraction currently weighs down on GM’s valuation. I believe September may bring profit-taking in the shares, pushing them toward to $27.5 level or even below. Such a drop would offer a better entry point into the shares.
If you already own GM stock, you might want to stay the course and hold onto your position. That said, if you are worried about further profit-taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3% to 5% below the current price point to protect the profits you’ve already made from GM shares since March.
If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon (Oct. 16 expiry). Such a covered call position would offer you some downside protection. You would also be able to participate in a potential up move.
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The author has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.