Bullish On GM? Unconventional Opportunities Are Out There

Nov.24.13 | About: General Motors (GM)

General Motors (NYSE:GM) stock has had a good year thus far - but warrants that trade on the company have had a better year. Investors who are bullish on the company's longer term prospects should consider investing in the warrants instead of the common stock.

The chart below shows the performance of GM shares as well as the three series of warrants that trade on the name. GM shares are up roughly 30% YTD but the GM Series B warrants are up nearly 60%.

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Here's an introduction to warrants if you are not familiar with them. The table below lays out the relevant information for each of the three series of warrants that currently trade on GM. Links to each instrument's prospectus is provided in the first row.

GM Stock

GM Series A Warrants

GM Series B Warrants

GM Series C Warrants

Current Price







July 10, 2016

July 10, 2019

December 21, 2015

Strike Price





Time Till Expiration (years)





CAGR Required for Break-even





Stock Price Where Return of Warrant is Greater Than Return of Stock ($)





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The last row of the table shows the common stock price levels at which the returns of each of the warrants is equal or greater than the returns of the common stock. So if investors think the stock price will be above these levels when the warrants expire, the warrants should offer a higher return. Note that any future dividends are not included in this analysis.

According to commonstockwarrants.com, a warrant valuation service, the GM Series A warrant is fairly valued while the Series B and Series C warrants are undervalued at current levels.

From a fundamental perspective, the story for GM looks good but may be running out of short-term catalysts.

On November 22, the US Treasury announced they were on track to finish liquidating their stake in the company by the end of CY 2013. This is several months earlier than their previous target date - of March 2014. The end of the treasury sales will end massive selling pressure that has been on the stock all year. Following the company's IPO, the treasury held 912 million shares of common stock. By the end of the year, the market will have absorbed all of these new shares for sale and still posted impressive performance.

The Canadian government still holds 110.1 million shares of the company. They recently commented that they have no immediate timetable to sell their shares and that any future plans to sell shares will be focused on maximizing taxpayer value, not on a timetable. They did note that the share sales could positively contribute to the 2015-2016 budget. So these shares won't be sold anytime soon. While that helps the supply/demand dynamics of shares, the prospect of these shares being sold will weigh on the investment outlook in the company.

The last large group that owns shares in the company through the bailout is the UAW-VEBA. In September, GM announced they were buying back $3.2 billion in preferred shares with a 9% yield from the UAW-VEBA. After this repurchase, the UAW still owns $3.2 billion in preferred shares and 140 million shares of common stock. In June 2013, the organization sold 20 million shares of common stock but have announced no further plans to sell shares.

This purchase of preferred shares was financed with a note issuance at a weighted average yield of 4.875%. This transaction meaningfully reduces the company's interest costs. The remaining preferred shares held by the UAW-VEBA present another opportunity to further lower costs.

There are several aspects of GM which suggest the recent rise is overdone. First, in the chart above, the PE ratio thus far this year is noted at the bottom. The recent rally has lifted the company's PE ratio to the highest level since the company's 2010 IPO. While this is alarming, the ratio is still below the S&P 500's ratio as a whole.

Another aspect that suggests a pause is warranted is the high level of hedge fund ownership. According to Factset, roughly 5% of the GM shares outstanding are held by hedge funds. The stock is also one of the 50 most widely-held hedge fund stocks. This 'fast money' could desert the stock at any point, leading to a drop in shares. In fact, a catalyst for these sales could be a 'sell the news' reaction to news that the US treasury has completed liquidating their ownership stake in the company. This scenario is more likely because there are no announced plans to sell the additional shares held by the UAW-VEBA and Canadian governments. This could be perceived as a lack of near-term catalysts.

These negative aspects have not weighed too heavily on the outlook for shares though. Earlier this month, UBS noted GM as their top consumer discretionary stock for 2014. They have a target of $52 on the stock. If the stock rallies to this level, investors would see better returns in any of the three warrants than in the common stock.

If you are bullish over longer-term timeframes on the company, warrants could be a good way to express this view. The prices noted in the last row of the table above show the prices at which it makes more sense to own the warrant than the common stock. Investors expecting at least a minimal rally should consider investing in the Series A and Series B warrants instead of common stock. Investors who are very positive on GM over the next two years can also consider the Series C warrants.

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.

Additional disclosure: I am long GM Series B warrants.