By Matt Doiron
According to a filing with the SEC, Board member Thomas Schoewe of General Motors Company (GM) purchased about 3,800 shares of the company on November 6th at an average price of $25.95 per share. Studies show that on average insider purchases tend to be bullish signs but the consistent insider activity (including Schoewe's own purchase of 3,800 shares in March of this year at a slightly higher price) has failed to pay off as GM is currently down 27% from its IPO price of almost exactly two years ago. The stock is up 18% year to date, thanks to a strong performance since late July, but a number of insiders are still looking at paper losses.
The biggest GM champion in the hedge fund community is billionaire David Einhorn of Greenlight Capital. He has been long the stock for some time. During the second quarter Greenlight increased its stake by 18%, and it owned over 17 million shares at the end of June; this made it the third largest position by market value in the fund's 13F portfolio. At the Value Investing Congress, Einhorn presented GM as one of his two long picks (CIGNA Corporation (CI) was his other long pick; Einhorn recommended shorting Green Mountain Coffee Roasters Inc. (GMCR) and Chipotle Mexican Grill, Inc. (CMG)). He made three arguments in support of buying GM: first, that European losses (which are currently partially offsetting U.S. earnings) would turn to profits by 2015; second, that China would serve as a growth opportunity; third, that there is a backlog of demand in the U.S. market. Other billionaires with positions in General Motors Company include Warren Buffett (see Berkshire Hathaway's favorite stocks) and David Tepper, whose Appaloosa Management more than doubled the size of its position in the second quarter.
In the third quarter of the year, GM's net income slipped 13% versus the third quarter of 2011 though revenue was up slightly. GM Europe's losses increased by 64%; EBIT for the first three quarters of the year was negative $1.1 billion versus negative $190 million a year earlier. October U.S. market share figures show GM's market share slipping from October 2011 (though a larger market has pushed its sales up) though the decline since the beginning of this year (which we can estimate by comparing October and YTD figures) has been very small. So strength in the U.S. market shouldn't benefit GM much compared to its peers. GM's joint ventures in China are interesting, but we're wary of depending too much on that country for a company's prospects.
At 7 times forward earnings estimates, General Motors isn't much cheaper than Ford Motor Company (F), which currently carries a forward P/E of 8. With Ford's revenue and earnings about flat compared to a year ago, we think that company is safer in terms of getting through the next few years with a similar upside. Toyota Motor Corporation (TM) and Honda Motor Co Ltd (HMC) are two other peers. Both of these companies trade at 13 times trailing earnings, and as they work off some of the lingering effects on trailing earnings from the Fukushima disaster in 2011 and grow their businesses further both carry forward P/Es of 10 or lower. With many of the arguments for GM boiling down to "the auto industry will do better" and in particular the company probably not being as able to capitalize on a pickup in U.S. demand as these companies, they might also be considered as better buys. Investors who want exposure to the industry without buying an actual automaker could also consider The Goodyear Tire & Rubber Company (GT), Cooper Tire & Rubber Company (CTB), Delphi Automotive PLC (DLPH), or other auto parts companies.
The insider purchase at GM would normally be a good sign, but the stock has been a trap for insider followers for some time. Any improvement at GM would likely be macro-driven, and therefore also benefit safer peers which are currently trading at only slightly higher P/E multiples. As a result we don't think that investors should buy the stock.