GM Stock: People Still Buying Despite Probable Bankruptcy

General Motors (GM) seems almost certain to file for Chapter 11 protection within days (or hours), yet somebody is still buying the company’s stock—even though it would essentially be wiped out the moment GM declares bankruptcy.

Sure, the share price has steadily fallen for months, to pitiful levels barely above a dollar. But as most shareholders have been selling, buyers have been on the other end of those trades. Just look at the stock chart for a given day, and notice the upward squiggles disrupting the stock’s downward movement; each of those upticks represents buyers temporarily driving up the price, if only by a penny or two, before the stock resumes its sad spiral.

Data compiled by Thomson Reuters through mid-May shows that big investment firms like Vanguard, Northern Trust (NTRS), Barclay’s (BCS) and Charles Schwab (SCHW) have been net buyers of GM stock in 2009. Maybe they’ve been gambling that GM will pull off a last-minute miracle and somehow avert bankruptcy, or that the U.S. government, about to become GM’s biggest shareholder, will bang some heads and hammer out a deal. Maybe they just think that GM stock is so cheap it can’t hurt to buy a few shares of this once proud blue-chip firm. Maybe it’s pure, pathetic nostalgia.

Buying GM stock at a buck isn’t crazy, even now. Not long ago, many analysts thought Ford (F) would follow GM and Chrysler into the government’s arms – and then into bankruptcy – but Ford has managed to turn its own ship around. Grabbing a few customers fleeing the other two domestic automakers hasn’t hurt. If you got the timing right and took a chance on Ford in mid-February, when its stock was sweeping the gutter at about $1.50 a share, you’ve already made a tidy little sum. Ford’s now trading at about $5.30, so 100 shares bought at the February low for $150 would be worth $530 now, a 250 percent return in three months.

Even lowly AIG has been a decent investment this year. After the revolting bonus scandal broke in March and AIG became a bigger public enemy than al Qaeda, its stock fell almost as low as a stock can go, bottoming out at 33 cents a share. It’s now back solidly into the low single digits, at one point cresting $2 per share in early May. Its recent closing price of about $1.70 represents a 415 percent return since March.

The odds of GM pulling out of its beeline toward bankruptcy seem slight—but greater than zero. If by chance it happens, GM stock will surely spike. To $3? $5? $10? We’ll probably never know. But a few investors out there would sure like to find out.

Disclosure: no positions

Comments

[Bubilina:]

You bet

May 28 08:57 AM

[xoxoxo:]

idiotic - Ford took no us govt debt - GM is now taking 50-70bn from us govt - more billions from Canada (perhaps $8bn) and offering UAW $9bn in notes and preferred.

Taking the mid point of the US govt number ($60bn) plus $8bn plus $9bn gets you $73bn for a pro forma enterprise value assuming all other debts are wiped out.

GM's own optimistic enterprise value estimate in Feb. was only $65bn and that was using a 2012-2013 level of profits discounted back. They burn cash in the interim.

The equity should have negative value with all that is ahead of them.

May 28 09:07 AM

[casey00001:]

Obama is all about image. Rule number one is that he doesn't care about how much money he spends in his first term as long as he gets re-elected. So he has appeased the Unions to vote for him again. He has very little to lose by throwing the bondholders a last minute bone to try stop bankruptcy and be a HERO, another accolade for "himself" .
In reality the bondholders are not that much of a stumbling block if you go along with the premise that Obama is going to spend the money anyways, its not his money. The real reason for the bankruptcy is that it is now the only way to get rid of the dealerships who in my opinion should stay is bankruptcy. The dealers and are in the same lifeboat as the bondholders. I think GM is crazy because if all these cancelled dealerships sell used cars or another brand they further reduce their market share. I am not going to drive 50 miles just to look at a new GM car in person.

May 28 10:41 AM

[startupper:]

I just don't get it.
The US gouvernment is playing some tricky game with GM bondholders threatening to thrive the company into bankrupcy whereas they could swap the bonds entirely with gouvernment bond options where the holder is entitled to purchase the bond at some reasonable price in a reasonable period of time. The FED is buying gouvernment bonds anyhow in billions pumping more and more money in the markets. So the got the bonds, GM bondholders want bonds, so whats the deal ?
Could it be that some insiders know that and pump negative information on GM into the media in parallel buying stock over the above mentioned firms ??!!!!
[e-mail]

May 28 04:55 PM