- 13F filings show Soros, Cooperman, Bass, and Jana have aggressively bought GM shares
- Given stake sizes, these firms have the capacity to keep adding
- The U.S. auto market is strong, and GM is improving in Europe while leading the Chinese Market
- GM will earn at least $4.05 in 2014, giving shares a fair value of at least $48
- With a strong balance sheet, GM will continue to return cash to shareholders
On Friday, hedge funds had to report their holdings as of December 31, 2013. Announcements of new or removed stakes can move stocks as investors follow the lead of investing titans. After looking through some of these 13F filings (summary available here), it is clear that one stock has become a hedge fund favorite: General Motors (GM). Several big-name funds have moved into the stock, and with shares down 12% since the start of 2014, now is the perfect time to follow hedge funds into GM at an extremely attractive price.
While investing titans like Warren Buffett have exceptional track records, no one is infallible, so following any single investor into a stock is fraught with risk. However, when multiple investing whales enter a stock, it is even likelier that the stock is an exceptionally attractive investment. There are now a plethora of investors who are accumulating stakes in General Motors. Leon Cooperman's Omega Advisors now has a 1 million share stake in GM. Kyle Bass who has publicly touted GM during the last quarter now holds over 4.6 million shares through Hayman Capital. Activist fund Jana Partners was even more aggressive, increasing its holding from 400,000 shares to 7.9 million shares in the quarter. George Soros's fund also has a 4.9 million share stake compared to 1.3 million shares at the end of last quarter. Soros also has 1.4 million call options.
Clearly, bullish sentiment has increased dramatically in General Motors, but these funds are nowhere near tapped out. For instance, Cooperman has several positions in excess of $100 million, suggesting he could still triple the size of his investment. Jana, Bass, and Soros could similarly continue to add significantly to their positions. Investing off 13f filings can be risky because they are backward looking; these stakes could have been sold between December 31 and the current day. Theoretically, you could be buying shares one of these firms is selling because of a filing showing they used to own the stock. Further, once all of the buyers are in a stock, it suggests a top has already been hit. These funds are clearly becoming bullish on GM, but given the size of their stakes, they are still in a position to add, which should help the price momentum going forward.
Obviously, no investor should buy shares based solely on another individual's investment. It is important to consider fundamentals. A close look at GM shows that it is a strong buy. Its business is improving, balance sheet is strong, and valuation extremely low. In other words, it is obvious why all of these funds are turning bullish. Now, some investors were disappointed with recent results and guidance, which have been the reason for the recent underperformance. In reality, GM continues to perform well. In the most recent quarter, GM earned $0.67 ex-items compared to expectations for $0.88 while revenue of $40.5 billion missed expectations of $40.9 billion (results available here). While revenue was up 3%, this number was a bit disappointing, though there were some dealer inventory issues in the quarter. This EPS miss was driven by restructuring costs and a higher tax rate.
However, earnings before interest (EBIT) was terrific. EBIT came in at $1.9 billion, which is up dramatically from last year's $1.2 billion figure. EBIT strength was across the board in virtually every segment. Thanks to a robust North American retail market, the region's EBIT was $1.9 billion (up 73% year over year). Europe was also a lot better than I feared. I was looking for an EBIT loss of about $450-$500 million, but the company only lost $300 million, which was much better than last year's $800 million loss. GM had been late to cut capacity on the continent and has been hampered by a confused brand strategy. As a consequence, is still about a year behind Ford (F). GM is finally catching up, and Europe will be less of a drag going forward. The European economy remains weaker than the U.S., but 2014 should be somewhat better than 2013. This unit will be riddled with restructuring charges this year due to further capacity cuts, but GM appears capable of breaking even in Europe in 2015. GM is also a premiere play on Asia as it sells more vehicles in China than the United States. While China is slowing, it is still growing over 7%, which will power higher vehicle sales.
Given a slightly better macro environment in Europe, similar one in the U.S., and slightly weaker one in China, GM should earn at least $4.05 this year, giving shares an 8.9x multiple. With these earnings, GM should generate $12-$13 billion in cash. With $7.5 billion in cap-ex, free cash flow will be $4.5-$5.5 billion. Shares are trading at an attractive 11.6x free cash flow. GM can also return this cash thanks to a fantastic balance sheet that carries $21 billion in net cash ($1 billion including the underfunded pensions). Thanks to an 80% funded status, GM will not be forced to contribute to its pension for five years. GM is starting to return cash with a 3.3% dividend yield and hopefully will launch a large buyback in the next 12 months.
Hedge funds are moving into GM because it has right-sized its cost structure in the U.S. and is doing so in Europe. As a consequence, the firm is once again extremely profitable, and it can start to return cash to shareholders. Thanks to its controversial bankruptcy in 2009, its balance sheet is pristine with a net cash position (excluding pensions) that accounts for 36% of its market capitalization. GM can return billions in buybacks and dividends while continuing to invest in R&D to compete with Ford and other automakers. If GM trades at just 12x earnings, shares will rally 33% to $48. GM, along with Ford, is a compelling value, and hedge funds have been aggressively buying the stock given its low valuations. Thanks to the wrongheaded decline on weak EPS guidance even though cash flow is fantastic, investors can now buy in even cheaper. In this case, investors should follow the 13f's and buy GM.