GM Stock: Bargain or Bust?

BOSTON – Ray in Livonia, Mich., is torn between optimism and frustration. The long-time General Motors shareholder had just learned that his favorite company suffered a crushing fourth-quarter loss, it's fifth consecutive quarter in the red. Over the last five years, he's seen the stock lose about two-thirds of its value.

That's where the frustration comes in.

"But I look at GM and see a stock that's got a dividend of more than 8%, and which I still believe will be here in a decade or two," Ray wrote in an e-mail shortly after GM's earnings announcement. "So I'm wondering if maybe, after all of the bad news, it's a bargain again."

That's wishful thinking, because buying into GM right now would be a Stupid Investment of the Week.

Stupid Investment of the Week highlights the conditions and flaws that make a security less than ideal for the average consumer, in the hope that showcasing trouble in one situation will make it easier for readers to root out elsewhere. While obviously not a purchase recommendation, neither is this column meant to be an automatic sell signal, as there may be times when unloading a worrisome investment creates its own set of problems. In the case of long-time shareholders like Ray, for example, long-term capital gains may enter the picture.

The case for buying General Motors Corp. (GM) is not much more complicated than Ray laid out in his note. There's the big dividend yield, the chance to buy a big-name blue-chip stock for a lot less than he would have imagined possible in years past, and there is the presence of Kirk Kerkorian and his Tracinda Corp.

Kerkorian has been buying GM shares and working to get Tracinda representatives onto the company's board of directors, intent on working to improve future performance.

He's not the kind of guy who throws money away, which is why Ray takes solace in Kerkorian's involvement. A lot of analysts, however, are wondering what it is that Kerkorian is looking at.

That's because the case for avoiding GM is so strong. To borrow from the commercials of the company's bygone Oldsmobile unit, "This is not your father's General Motors."

Ray's thought process is, however, spawned from the way our fathers saw the stock, as a kind of widow-and-orphan issue, a perpetual powerhouse. GM hasn't been that company for years.

Start with the stock price; while GM has been beaten down in recent years, it's still trading above most fair-value estimates. It would need to lose about 25% just to get to its fair-market value; at that point, to be beaten down sufficiently that the stock truly is a buy-on-bad-news candidate, it would have to lose another 40% to 50%. Ray's buy-it-when-it's-down concept may work, but probably not until the stock price has moved down to single digits.

The dividend looks great right now, standing in the high 8% range; in fact, it would look pretty good to most income investors if it were at half of its current level. That's a good thing, too, because the bet here is that GM is going to have to reduce the dividend, probably cutting it in half in the next year.

While many long-time GM supporters still see the value of investing in the Big Three automakers, the truth is that they're not so big anymore. These days, it's the Global Six (the Big Three plus Toyota, Nissan and Honda), or maybe even the Global Seven (throw in Hyundai for good measure).

GM's products are improving and it has some exciting things in the pipeline, but the competition is not exactly moving forward in low gear. Competition is only getting more fierce (one new sign that the competition is aiming directly at GM's heart was Toyota's announcement this week that it will be racing Camry cars on the Nascar circuit in 2007).

Then there is the company's huge issues over health-care obligations for its workers; the shortfall in funding for those medical considerations swallows more than $90 per share of value.

There's no relief in the company's fundamentals. While it's not hard to find a balance sheet that is more homely, no one is going to look at the numbers and mistake the company for an immediate buy. Morningstar Inc. considers the stock to be "distressed," a label it pins on firms with serious operating problems.

And the economy isn't exactly making the ride any more comfortable. Increased gas prices are a problem, as some of GM's most innovative new products are trucks and large-scale sport-utility vehicles, which consumers might back away from if the numbers at the pump remain high. Sluggish consumer spending and the steady rise of interest rates have hurt the stock over its losing streak, and those trends won't turnaround overnight.

If those conditions can improve, that would help GM. So, too, would a new union contract -- likely to be negotiated late this year and put into effect a year later -- if it brings concessions that help ease the company's health-care and pension issues.

But none of those things is clear enough that it can be counted on right now, which means GM can't be considered a buy-on-the-dip candidate. And while Kerkorian is buying, he's definitely not the "average investor" and he is clearly looking at something the ordinary guy just can't see at this point.

"It's hard to imagine what the upside catalyst is, what specifically is going to change things and lead GM to a turnaround," says Morningstar analyst John Novak. "The list of negatives is so long, and you look at the positives and there's just not enough there to have any confidence at all. ... It probably will get worse before it gets better, so it's possible that GM will be a buy again someday, but that day's a long way off."

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