Wednesday, March 16, 2005


The big news today is about GM's negative outlook. The chart of GM shows the stock is at a ten year low. The stock had a nice run from 1995 to 2000 which was a similar time to the way 2005 to 2010 is shaping up. On the other hand, this stock is selling for the same price it was 34 years ago according to!

This stock was selling for the same price 34 years ago! I repeated the statement for emphasis because no gain for 34 years is a terrible performance. The stock paid a good dividend during those years and the current yield is 6.87%!

A friend of mine who retired from GMAC says that Cadillac is offering a $17,000 discount. Don't tell me that the market is not rapidly adjusting to higher oil prices. The fact is that GM can not give away its biggest gasoline guzzlers. Oil prices soared this morning, back-tracked mid day and will likely close at all time highs. Contrary thinking suggest one should remember that the reason for high oil prices is a strong global economy.

Years ago, David Dreman wrote an article in Forbes or included in one of his "Contrarian" investment books about the one year rule. His one year rule is that one should wait about a year before buying shares in a fallen stock. The type of stock he was talking about was like GM. A widely known company that makes big news after it has already fallen far from its peak price. David ran a number of studies using Compustate data to show that the biggest part of the decline is over when the bad news makes front page but the up move takes an average of one more year.

The margins are so large on the big cars and SUV's that GM can offer free financing and discounts and still make a nice gross margin. The real problem GM has is that the costs of heath care and other benefits to well paid employees take away the margin. If it weren't for the payoff from the motor division to GMAC, the company would never show a profit.

The most interesting thing is that the car companies have been able to turn the normal business cycle on its head. Consumer discretionary big ticket items normally go begging when the industrial expansion phase of a recovery starts. By offering "free" financing, GM has made the deals look all the better when interest rates are high!

My bottom line is that I had much rather own GM than a bond right now. The risk of a bond declining in value is relatively high whereas the risk that GM will cut its 6.87% yield is relatively low. Some good years are ahead for stocks. While I might wait 6 months to a year before buying GM, I would not be uncomfortable owning it now and a 6% annual move in the stock price from here would yield a total return of upwards of 12%!