Short Ideas: Kick GM While It's Down

The market continues to show signs of longer term moves to the downside as the Dow Jones Industrials has become the first major index to give a sell signal. The Russell 2000 followed the Dow, the NASDAQ, and the S&P 500 giving a hold signal at the end of last week. But now we have one of the major four indexes giving a sell signal. I would look for areas to be short and stocks to sell to create a cash position until the market improves.

One stock that would be a good place to look for more downside movement is General Motors (GM). With the high price of oil and the weak domestic economy, GM does not look to improve its earnings potential quickly. Hitting a new 52 week low today, the company fell 1% on a pretty decent day for equities and a day that saw a reversal in oil from the current trend.

Analysts have decreased their earning expectations for the company in the current quarter, the next quarter, this year and next year fairly aggressively over the past 90 days. Once thought to be breaking even in the current quarter, now analysts are expecting a 0.84 loss when the company reports next. Next quarter has moved from an expected 0.14 cent loss to a 0.67 cent loss over the same 90 day period.

The stock for GM has declined 42% in the last year and shorts have established a 17% position of the stock’s float, anticipating further decline in price. Once a big producer of pickup trucks and sport utility vehicles the company is moving to reduce plant utilization at two Michigan plants that produce pickups due to a lack of demand. A decline in oil could lead to some stabilizing of the stock in the near term but the long-term picture looks worrisome for the auto-manufacturer.

Disclosure: None

Comments

[manohmanoh:]

This would be more insightful if you had written this article in October, rather than after a 60% decline. I bought GM yesterday, as it turns out, as I believe they have made tremendous strides in design and quality improvements, and their push [back] into electric cars is the only logical long-term end-game for the auto industry. You may be 100% correct over the next 6-12 months (if I really thought that, I wouldn't have purchased, of course), but GM is a long-term INTERNATIONAL winner (domestic will never be the growth engine of this company again) ... I'll take it for a long-term (5yrs+) in my portfolio. I will also buy more on price declines... as I'm only at about a "1/2" position at the moment. Best of luck to you (you know, on your OTHER picks ... LOL).

2008 May 28 06:37 AM

[coeus89:]

i wish i bought now instead of a year ago lol. i too am a long gm. and a long ford. tm and hmc are not growth stories anymore. gm and ford will recover

2008 May 28 12:03 PM

[fool me twi...:]

Shorting a stock at its 20-year low?!

Better investing advice: "Buy low. Sell high."

2008 May 28 03:34 PM

[Steve Patte...:]

The analyst downgrades are new. This isn't a stock that has hit a new low on no news and is starting to rebound. GM might stabilize in the short term as I wrote in the article but over the next several months I see continued downward pressure.

2008 May 29 12:20 AM

[manohmanoh:]

Have you ever back-tested a strategy based on analyst upgrades and downgrades? Give it a whirl ... sad commentary on the "talent" embodied in that industry, truly. No doubt GM has its issues and headwinds ... but for me personally, unless an analyst has meaningful insight (rare, quite honestly), I take their upgrades and downgrades with a grain of salt ... in truth, I have to rein in the true cynic in me that wants to take it as a contrary indicator (which is also a mistake, in the sense of putting too much weight on their opinions, contrary or otherwise)...

2008 May 29 01:13 AM

[Ames Tiedeman:]

GM is a strong buy at 17.10. Wait a few months. They are on the verge of a major earning revival.

2008 Jun 01 08:39 AM

[J Lee:]

When a stock is weak play it on the short side, when a stock is strong play it on the long side. Now, ask your self if GM stock is weak or strong. That gives a clue as to which side to play it.

2008 Jun 02 12:34 PM

[mojotronic:]

Mr. Wendling is totally correct about short manipulation of the market.
John Lee is naive and simplistic about "weak" and "strong" stocks.

Deregulated "short interest" in today's markets is probably the single most important factor creating instability, even more than the price of oil or the falling dollar. While millions of new investors pour into the markets due to the lure of cheap online trading, their attempts at fundamental or technical analysis are thwarted by the collusion of short fund managers and short editorialists, who attack entire sectors, driving down the price of good and bad companies indiscriminately.

Eventually all these new investors--the millions who are outside the Wall Street loop--will give up trying and take their money to the bond and real estate markets. If you can't sell a house, at least you can rent it.

Short-sighted, unregulated greed will be the downfall of Wall Street.

2008 Jun 11 11:40 AM