General Motors, Inc. (GM) shares have long-term potential, but the stock is probably best to avoid for now. There is a good chance the stock will stay close to where it is now and at worst, fall further. Here are four reasons why investors might want to wait by the sidelines for now and consider the stock later this year at what might be lower levels:
1) GM has significant exposure to Europe and the company has been losing money there for many years. With the crisis deepening in Spain and other countries, the losses are likely to grow. GM lost about $747 million in Europe last year, and those losses are poised to grow in 2012. To get an idea of how weak car sales are in Europe, consider that auto sales in France dropped about 30% in March. GM sales in France dropped around 26% in March. As the European debt crisis heats up again over Spain, we can expect the shares of most companies with significant European exposure to exhibit weakness.
2) GM has another overhang, and that is the fact that it accepted bailout funds from the U.S. Government. That deal resulted in the U.S. Government owning about 30% of the company, which is equivalent to about 500 million shares. Those shares will be sold sooner or later, and the timing and impact of that could put great pressure on the share price. Even just a news release that a sale of shares is planned could put pressure on the stock. GM has a recent average daily volume of about 11 million shares, so the sale of 500 million shares is very significant.
3) GM also has significant exposure to the Chinese economy and that is seeing a slowdown. Recent data shows that economic growth in China has fallen to a three-year low. Some investors believe China will see a soft landing, but others believe it will suffer a hard landing especially as exports to Europe weaken. A hard landing in China could add significant pressure to GM shares.
4) Some investors believe GM has completely turned the corner, and while there are positives to consider, the company is far from regaining the dominant position it once had. In fact, a recent CNBC article states that GM's U.S. market share is as low as it has been since 1922 at just 17.5%. Shrinking market share is something that will have to end for GM shares to see long-term growth.
With all the headwinds facing GM, I think it makes sense to wait by the sidelines for what might be more ideal buying opportunities.
Key Data Points From Yahoo Finance:
52-Week Range: $19 to $33.47
2012 Earnings Estimate: $3.67 per share
2013 Earnings Estimate: $4.66 per share
P/E Ratio: about 7 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.