General Motors (NYSE:GM) is an American car company that has revamped its lineup and increased the quality of its product. Emerging from bankruptcy in 2010, GM's stock price has been considerably volatile, not always a bad thing. Since emerging, the company has continued to produce profits.
GM reported its earnings on February 14th. The current EPS stands at $2.92 a share. GM saw year-over-year quarterly earnings growth of 64.70%. GM achieved this growth even though the European market is seriously lagging.
At a price of $26.51 (Thursday's close) and using current earnings, the company is trading at a P/E of 9.08. The annual growth for the next 5 years is estimated at 12.50%. This gives us a PEG of .73. From the PEG, we get a "fair market price" based on growth of about $36.32. Based on this calculation there is a 37% upside.
Now that we see GM is priced well under its growth price, let's look at the Graham Number. I know Graham has many other criteria in selecting a stock. However, at a quick glance, the Graham Number alone is an excellent tool to gauge the value of a stock.
Square root of (22.5 x Earnings per Share x Book Value per Share)
Or Square root of (22.5 x 2.92 x 18.92) = $35.26
From this we get a Graham Number of $35.26. Conservatively, from a value standpoint, this is the most that should be paid for this stock. Currently, based on the Graham Number the stock has a 33% upside.
Currently, the major concern is growth in Europe. This is what hurt GM the most this quarter, and based on what other car manufactures are reporting, it does not seem it will end any time soon. Car manufactures are considered cyclical stocks, meaning their growth comes in cycles. My major concern is that GM's growth cycle will end before it can take advantage of the European market.
GM hit a 52-week low on July 25th at $18.72 a share. After hitting a 52-week high of $30.68 on January 15th, GM has dropped back down in the past month. It is currently below its 10 and 50 SMA.
To pick a stock I first look at the fundamentals of a company. Is the company making money and will it continue to do so in the future at a reasonable growth rate? I also check the Graham Number. If a price is considerably above the Graham Number, I move on to the next candidate. I like to see the Graham Number lower than the PEG growth number. It shows me that the stock is still growing. I like it even better if the current price is below the Graham Number, the more conservative of the two. There are other things I look at, but these are usually the first two.
I then look at the chart and try to gauge when a good time to buy is. I know I'm not going to buy the absolute bottom, but I'd like to come as close as possible. I also do not want to try and chase the stock as it's rising or catch a falling knife.
GM is another intermediate to long term investment that has great potential. The PEG and Graham Number both indicate that GM is trading well below its proper value. Also taking into account GM is selling off from a high of $30.68 just adds to the opportunity at hand. GM seems to be heading to its 200 SMA of $23.86. At this level, there is a potential 48 - 52% upside.
I have expressed only some of the criteria I use to decide if a stock is right for me. I always recommend conducting one's own research before making any investment decisions.