Holding My Nose And Buying 'Government Motors'

| About: General Motors (GM)

I have several philosophical rules when it comes to investing. First, I try to avoid investments in any companies that have significant unionization. Although acknowledging with full gratitude unions' contributions to improving work conditions starting early in the 20th century, I believe their time has come and gone. More importantly, it seems every time I have made a major investment in a company with a strong union presence, it has been hit by a major strike within two years of my investment. This does not help the stock price or earnings.

One of my other rules is I try to avoid industries or stocks that rely excessively on government subsidies or largesse. It is one reason I have completely avoided most of the alternative energy space. I especially avoid solar stocks, which move much more in response to the latest expiration of subsidies or extension of tax credits than fundamentals like revenue and/or earnings growth. I violated both of these core philosophical tenets yesterday by picking up some General Motors (NYSE:GM), which some still refer to derisively as "Government Motors" due to the huge government intervention and bailout during the financial crisis. This effort included rewriting hundreds of years of bankruptcy law to subvert creditor hierarchy, and has left a bad taste in many mouths that will not be soon forgotten.

That said, sometimes you have to hold your nose and make a few exceptions to your normal rules when the situation warrants it. Emotion is also something that should kept out of investment decisions whenever possible. The simple fact is that General Motors is a very cheap stock, the tailwinds for U.S. auto manufacturing are solid, and outside of Europe the company is hitting on all cylinders.

U.S. auto production is robust right now with inventories down and it looks as if U.S. vehicle production will be over 15 million this year. Some analysts are even calling for a 16 million run rate. In addition, GM is making consistent progress for the first time in quite awhile, increasing market share among 18- to 24-year-olds as well as 25- to 34-year-olds due to new offerings in fuel efficient small and midsize cars. This bodes well for future sales. Even the average age of Buick buyers has dropped from 64 to 57 over the past five years (thanks to Shaq and also to a robust leasing program).

General Motors has a huge presence in China and gets two-thirds of its revenues from outside the United States. Sales in China including joint ventures are up some 8% YTD. The company is also well positioned to benefit from the problems Japanese automakers face given the deteriorating relations between Asia's two industrial giants. The one big challenge right now for the company is Europe, which almost every automaker with a presence on the continent faces as auto sales are at historical lows. It is losing some $2 billion annually at its Opel subsidiary, but does have a plan in place to turn around Europe over time.

The bankruptcy process took a lot of costs out of GM's operations and rebuilt its balance sheet. It can now be profitable at a much lower run rate and hugely profitable at the 15 million domestic auto production rate we are currently at. The government is slowly reducing its ownership stake, and the company is gradually regaining freedom of movement as that stake gets reduced. It should be able to reinstate a dividend at some point in the future. General Motors has consistently grown its operating cash flow after its re-IPO. The stock is cheap at under 6.5x 2014's projected earnings. Credit Suisse believes the company can make more than $5.25 a share in FY 2015. The analyst firm also has an "Outperform" rating and a $35 price target on the shares. This would be 25% above its current price of $28 a share. Given the pent up demand after the financial crisis in the United States and fast-growing sales in China, the shares are just too much of a bargain to pass up here.

Disclosure: I am long GM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.