The Oracle of Omaha, Warren Buffett, announced yesterday after the close of trading that he purchased 10 million shares of General Motors (GM) during the first quarter. The stock traded up almost 5% following the news, but is the news really that good? Buffett is thought to be one of the best investors of our time, but he has made some bad bets in the past. The fact that he purchased GM does not mean that GM will instantly become a good company.
GM's CEO Dan Akerson gave a "B" rating to his job at GM this year. My grade is not much different for him, maybe a B- or a C+ because he has done some amazing things for the company. He managed to turn a profit in North America, kept the company's debt relatively well managed, and has some exciting new additions to its line-up. However, that being said, there are still too many negatives to suggest that now is a good time to purchase GM's stock. The stock is down almost 20% over the past three months and little has changed from an investment standpoint. GM is losing market share in North America, and unlike its cross-town rival, Ford Motor Company (F), GM is not seeing the pricing power that Ford is. GM realized some pricing power during the first quarter, but not to the extent that Ford has.
Just about every analyst on the Street has GM with a buy or outperform recommendation. Most have decreased their price target over the past several months, but I reiterate that the share price is down almost 18% over the past three months. Interestingly enough, the stock is still up 10% year to date. Ford is my favorite of the automakers; looking five to 10 years down the road, yes GM will be higher, much higher; I just want to see a few more problems fixed before I would jump in with both feet. Europe is in shambles, China is slowing down (every car in China has to be sold through a joint venture, so GM only sees 50% of the profits), Latin America is seeing increased competition, but still the light at the end of the tunnel is the success in North America.
North America seems to be the only reason that Mr. Buffett could have purchased GM stock. Berkshire Hathaway (BRK.B) purchased approximately 1.4% of the float. Float is defined as the total number of shares publicly owned and available for trading. With 1.57 billion shares outstanding, and a 727 million-share float, this doesn't seem like a groundbreaking investment. Remember, the government still owns 33% of the 1.57 billion shares, and to be profitable, the share price has to appreciate to approximately $54.
This is good news for General Motors, but the company is still not out of the woods yet. As a result, I wouldn't be following Mr. Buffett into GM.