When you look under the hood of General Motors (NYSE:GM), you definitely see a turnaround taking place. The main question that remains on investors' minds is that of cyclicality. Are US auto sales, for example, near a cyclical top? Is the market predicting a cyclical top (which we are due) in this industry, which would result in GM stock not gaining traction despite reporting bumper sales quarter after quarter? That is the real question which, in effect, the company can't control. However, what it can control it is implementing very well, and if the stock market keeps on charging higher as it doing at present, then GM should go along for the ride in some state or form.
In saying this, GM's performance since February (when the stock market (NYSEARCA:SPY) printed its own intermediate cycle low) wasn't impressive, especially compared to that of its rival Ford (NYSE:F), which outperformed it by some distance. However, the important thing is that GM did participate in the stock market's latest rally. Furthermore, I believe the equity markets will continue to march higher probably both this year and next, which should bring some comfort to long-term investors in General Motors.
Here are a few areas that I like how the company has been transformed since it filed for bankruptcy protection back in 2009. More profitable retail customers have become the target as fleet sales have been reduced across the board. Cost reduction measures, which have significantly brought down breakeven levels, have also made a big impact on the business model.
Furthermore, China continues to provide strong demand for General Motors, as it seems the company has now cemented itself as the No. 1 foreign automaker in the region. General Motors wants to invest $14 billion (joint ventures) into China over the next 3 years, where factories and new models will be the priorities, which will enable the company to earn more market share in the region going forward.
Europe has been a disaster for the company in recent decades. In fact, it has been trying to break even in this region for the last 15 years, but to no avail. However, it is getting closer. The company lost $6 million in the first quarter versus a whopping $240 million in the first quarter of the 12 months prior. I live in Europe, so I can see first hand the popularity models such as the Opel Astra have garnered in recent months.
Furthermore, GM has nice pipeline of SUVs about to come on-stream in this region, which should put it up to the likes of Nissan's (OTCPK:NSANY) Qashqai and Honda's (NYSE:HMC) CR-V. If interest rates remain low, I don't see sales falling off in this region, as monthly payments are smaller, banks are much more lenient in giving credit and there is huge competition between the various manufacturers.
I like also how retail deliveries are up around 9% over the last 12 months (despite the small drop in May), which was well ahead of the industry average growth rate of 4%. In fact, April was a bumper month for retail sales (the best since 2006), as crossovers and pick-ups finally started to show the potential management knew they had.
Therefore, in terms of being a strict value play, General Motors definitely ticks the boxes. With a dividend yield of 5.13%, positive earnings growth (trailing 12-month average EPS is $6.63), positive gross and operating margin growth (12.5% and 4% respectively) and debt and cash positions being solid, it could be considered strange why this stock hasn't rallied harder after its recent set of earnings. Furthermore, GM's price-to-book, sales and cash flow are all below its 5-year averages, which again demonstrates a stock that is undervalued relative to its historical averages. One bone of contention some bears might have would be the company's pension problem, as it is substantially underfunded at present despite significant contributions.
Another would be its 10-year track record of dividend-paying history. This is where you see the stock doesn't have the necessary fundamentals to be a true value play. However, that doesn't mean we should dismiss it either. Why? Because anyone familiar with my writing will know that solely investing in dividend aristocrats (with excellent 10-year fundamentals) means that more often than not, you are going to be overpaying for your underlyings (as they usually sell at a premium).
So here is how I would trade GM. For me, the risk is to the downside, so my number one priority would be to protect the downside. So, if one held 100 shares of stock, it would set you back around $2,965. Holding stock is critical for this strategy to work. Then, I would sell Jade Lizards (a combination of an out-of-the-money call plus a put spread in the money). Here is the kicker. If the amount of premium received is more that the width of the call spread, then you have no risk to the downside. Why? You only have risk to the upside with your naked call. However, because we hold stock, if the share price cuts through your call strike, you will simply hand over your shares when the option reaches expiration. Simple strategy, but really potent for a stock like GM, where the upside is meaningful but downside risks linger (due to a potential auto loan bubble, topping of sales in the US market, etc.).
To sum up, I'm going to be adding a few good dividend and growth stocks to the Elevation Portfolio over the next several weeks, when I see value. In order to ensure that income is brought in every month, it's imperative that they are not correlated and all don't have similar valuations. You can follow along by pressing the "Follow" button above.
Disclosure: I am/we are 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.