General Motors (GM)
As I write, Warren Buffett’s Berkshire Hathaway (BRKB) is down about 6% year-to-date. It’s probably at a good entry point.
But for investors who like a little more involvement in their value investing, Cabot offers Roy Ward, whose Enterprising Model is up 5% since the start of the year.
More importantly, since the model’s inception on 3/10/05, Roy’s Enterprising Model has provided an impressive return of 165.4% compared to a return of 74.3% for the S&P 500 Index.
Today’s stock was selected using Roy’s Graham-Buffett methodology. Ben Graham was Warren Buffett’s teacher at Columbia University. He wrote several classic books on value investing. And I have no doubt that Isaac Newton’s famous quote, “If I have seen further it is by standing on the shoulders of giants” applies thoroughly to Buffett’s building on the lessons taught by Graham.
(By the way, Roy Ward is a second-generation disciple of Ben Graham—Roy’s professor at Babson College was also a student of Ben Graham at Columbia.)
General Motors (GM)
We all know General Motors. With $154 billion in revenues, its market capitalization is a lowly $57 billion. Debt is a factor, of course, as is the hard truth that the company’s revenues peaked back in 2006, and growth has been in the low single digits in recent years.
But the stock pays a dividend of 4.1%, which is nothing to sneeze at.
And its price-earnings ratio is just 10, though earnings are projected to grow 49% this year and 12% next year.
And nobody loves GM!
This is a key point, given that the cardinal rule of value investing is to buy when no one likes a stock, and sell when everyone likes it.
Here’s a recent chart of GM, doing nothing exciting.
Now, I don’t expect anything revolutionary from GM in the years ahead (though I do expect progress on their all-electric Chevy Bolt, which is addressing a small but fast-growing market). But I know that Roy’s system works, so I think that in a couple of years, GM will be substantially higher.
So, if you’re a long-term investor and you want to put some money to work for a couple of years in a place where it’s almost certain to do better than it would in the bank, you could simply jump in and buy the stock here; it’s trading just a few points above its 200-week moving average.
Cabot Top Ten Trader
From Cabot Wealth Advisory 1/17/13 Sign up for free Cabot Wealth Advisory e-newsletter
So, with the strength of the broad market in mind, I want to write about a well-known company that's in the midst of a major turnaround. I'm talking about General Motors (GM), which, after coming public again back in November 2010, suffered a wicked decline in the ensuing years, falling from a peak around 40 to a low of 19 a year later. But the stock then bottomed out over many months (it held support at 19 in October 2011, December 2011 and again in July 2012) and is now red hot.
Why the GM strength? Here's what I wrote about the company on January 7 in Cabot Top Ten Trader:
"Most people will be puzzled at how such an old, huge, disliked company can show up in Top Ten. But it shouldn't be that hard to believe at all; GM is one of the stronger stocks in the market for three simple reasons--it's dirt cheap, it's finally out of the control of Uncle Sam and business is very good.
"The company's December sales report, which was just announced last week, was up a decent 5%, but that marked the best December for GM in five years. In fact, new car sales for the industry as a whole grew double digits last year, continuing their recovery from the Great Recession ... yet they still remain about 15% to 20% below their pre-2008 levels. It's similar to the housing industry--with business still at relatively depressed levels but headed in the right direction, odds favor upside surprises. As for GM in particular, it earned about $3.25 per share last year, but that should jump toward $4 this year as business recovers, leaving the stock with a P/E of less than eight times earnings.
"Lastly, the company is set to shake free of the government's grip; it's agreed to buy back the remaining shares from the U.S. Treasury, which, if nothing else, helps investor perception in a big way. The stock's not going to double in a few weeks, but as turnaround stories go, we think GM has what it takes to be a winner."
The stock bolted from 25 in mid-December to 30.5 on Monday on the heels of the good news. However, shares did take something of a hit following dismal sales results in Europe (Ford reported similar numbers, so it was an industry-wide thing). I do think GM could continue to pull back and consolidate for a bit, but I'm not expecting a major retreat; my gut tells me these turnaround, cyclical stocks are still relatively early in their lift-off phases, and so likely won't need deep 15% or 20% retreats going ahead.
Bottom line: I think GM (and Ford (F) for that matter) looks buyable around here, though you could consider taking a smaller-than-normal position in case the stock's retreat deepens in the days ahead.
For more on Cabot Top Ten Trader, click here.
|General Motors Company (GM)
300 Renaissance Center
Detroit, Mighigan 48265-3000
|Index Membership: N/A
Sector: Consumer Goods
Industry: Auto Manufacturers - Major
Full Time Employees: 213,000
5/5/15 What Would Warren Buffett Do?