November 17, 2010

GM Stock: To Buy or Not to Buy

I just read a recent Reuters article carried on Yahoo titled GM has orders for $60 billion in stock: sources
I'm a little surprised there is so much interest in buying GM at this point.    It seems there are some good arguments to buy GM stock in the new IPO as well as some strong arguments against it.   As I see it here are some of the pros and cons of a buy:

Pros

  • The government has a large stake in the company.
  • GM has very strong overseas markets and is one of the most popular brands in China.   They'll hit 2M sales in China this year and Oct. sales were up 19%.
  • Should be profitable:   If US industry sales hit 10.5 million cars then GM is expected to to break even and sales this year are expected to hit 11.5M.   Sales could easily climb back up to pre-recession levels of 15M.
  • Exited bankruptcy with stronger balance sheet and cost structure.
  • PE approximately 5.1 according to a WSJ article


Cons

  • Already bailed out by the government.   Strong, well ran companies don't need government bailouts and subsidies.   
  • Cyclical nature of the auto industry.
  • High competition from a number of auto makers.
  • I'm not convinced they've turned around the culture within the company that lead to the previous failures.

I do not make investment recommendations so I'm not going to tell you if buying GM is a good idea or not.

Personally if I were to buy GM it would probably be as a short term speculative purchase (in other words "gambling").   And if I did buy any GM stock I wouldn't put much money into it. 

Photo by paul (dex)

3 comments:

  1. I don't believe I will be buying GM stock myself. Although, from what I have read, it won't be available to the average investor anyway. The shares will only be available to the large banks that already hold sway in GM after the bailout (Merril Lynch, J.P. Morgan Chase, Morgan Stanley). The discount brokers that most of us use (Scottrade, ING Direct, TD Ameritrade) have not been alloted a single share to sell.

    You could buy through your broker if you use one of these large banks, but expect to pony up more than $500,000 to get in on the action. I wouldn't risk it even if I had the money!

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  2. I made the mistake of buying GM before it crashed (only a small amount). On the good side, I also bought Ford. Between the two, I'm up a small amount.

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  3. DJ, I think it was probably just the initial IPO shares that were not available on the open market. It is now trading on NYSE as of today and my Scottrade account shows it as valid symbol to buy. I don't plan to buy it.

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