Investment guru Warren Buffett likes this stock, formerly one of the world’s most notorious equity market dogs. So does James Grant, founder of an eponymously named U.S. investment newsletter with a big following among the hedge fund crowd. Even our usually dour federal Finance Minister Jim Flaherty weighs in with a bullish take. He’s looking for higher prices before unloading the not-so-inconsequential position he oversees.
The company? General Motors Co., the auto giant that tumbled into bankruptcy during the financial crisis and suffered the ignominy of being rescued by U.S. and Canadian governments.
Ever since, GM has chafed under an image of being a hapless corporate giant, derisively dubbed Government Motors. But interest by canny investors in a stock as unloved as GM indicates the outlook may finally be brightening.
As with any turnaround story, there has to be a catalyst. In this case, it is the imminent departure of the U.S. government from GM’s shareholder list at a time when the fortunes of the auto business seem to be rapidly on the mend. Ford Motor Co. just gave a big sign things are improving by announcing it is doubling its dividend, something GM’s arch rival wouldn’t do without confidence in the outlook.
The U.S. Treasury Department expects to announce by the end of January how it is going to unload the remaining 300 million shares it gained through the bailout. The sales will take place over the next 12 to 15 months.
As an indication of how fast the Treasury wants to run from GM, last month it dumped 200 million shares for $27.50 (U.S.) each. GM, which should know a thing or two about the prospects for the company, was the buyer. Too bad for taxpayers that the Treasury had such an itchy trigger finger on its sell order. The shares are now changing hands for around $30.50. Waiting just a few weeks would have made an extra $600-million for taxpayers.
But governments, as we have come to learn, aim to socialize the losses and privatize the stock market gains when it comes to marketable investments. This occurs because governments don’t view themselves as long-term holders of companies they rescue. Their usual tendency is to bail earlier, often at a loss. While it’s a stupid move for the public purse, it often leaves potential profits on the table for investors to pick up.
GM seems to be a case in point. The cost to governments of their shares is around $53 each, so the rush to the exits in what appears to be an early stage of a turnaround doesn’t make much sense to a rational seller. It’s a buy high and sell low strategy.
Ottawa, to its credit, doesn’t seem to be in a hurry to sell its stake, which along with Ontario’s, amounts to more than 140 million shares. Late last year Mr. Flaherty vowed he would avoid a fire sale.
On the Street, analysts are warming toward GM. At Vancouver brokerage boutique Odlum Brown, a skeptical Stephen Boland began noticing many smart investors were taking a shine to the company. “We wondered why there was so much interest in a notoriously bad company operating in a tough industry,” he wrote to clients last month.
On closer inspection, Mr. Boland became a believer, issuing a “buy” call when the stock was at $24.57, along with a $40 target.
GM does have problems. It’s losing money in Europe and still has a large, unfunded pension liability, although the pension problem is due to low interest rates. If the cost of money rises, this negative will diminish.
The bull case is simple. GM has taken a meat cleaver to costs postbankruptcy, has a decent balance sheet, and trades at only five times estimated earnings per share for 2014. Mr. Boland figures the 2014 profit projections could be conservative if the auto turnaround continues.
“A lot of people are biased by the past when they think about GM. We were too. However, this is not the GM of old: the company is better run; the cost structure and financial position are much improved; the company is making vehicles people want to buy; and, most importantly, the firm is decently profitable,” he says.