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General Motors (GM) stock has been a major component of stock indexes, including the Dow Jones Industrial Average (DJIA), for almost a century. GM stock is considered a prime example of a “cyclical stock” because its stock price depends on economic growth and closely tracks the business cycle. It is also among the consumer cyclical stocks because its value as a company remains subject to the whims of consumers and the strength of the market for its goods.
Overview: General Motors and Stock History
Headquartered in Detroit, Michigan, General Motors has been the largest motor vehicle manufacturer during most of the past century, though by 2008, Japanese automaker Toyota Motors surpassed GM as the largest automaker in the world. GM stock was also replaced by Cisco Systems in the DJIA in the same year. The stock continued its collapse through 2009, trading below $1 per share on May 29, 2009, the lowest the stock had traded since 1933.
Check out a few fast facts about GM’s timeline through history:
- In the wake of the 2008 financial crisis, the Bush administration announced a plan in December of 2008 to aid GM. Despite the government loan, GM claimed it had $173 billion in debt and filed for Chapter 11 bankruptcy protection.
- By 2010, GM discontinued its Saturn and Pontiac brands and sold Saab and other foreign assets. When the sales were complete, GM was left with four U.S. divisions: Buick, Cadillac, Chevrolet and GMC.
- GM decided to once again offer shares to the public once it downsized. On November 17, 2010, GM raised $20.1 billion in an initial public offering (IPO) of stock at $33 per share.
- On December 15, 2010, GM repurchased all of its preferred stock from the U.S. Treasury for $2.1 billion, and by that year’s end, GM stock closed 2010 at $36.86, which was 10.5% higher than its IPO price.
- In September of 2019, 48,000 GM employees from the United Autoworkers Union went on strike, costing workers over $1 billion in wages. The strike lasted 6 weeks and cost GM approximately $2 billion in lost production.
- In March of 2020, the leaders of General Motors met with the heads of Fiat Chrysler and the Ford Motor Company to temporarily close their factories on a rotating basis due to the COVID-19 pandemic.
- The company also continues to be plagued by recalls. The most recent GM recall announced in December 2020 will affect 840,000 vehicles in the U.S for seat belt failures and suspension problems.
- GM stock currently trades at the $41.57 per share level, which is $8.57 above the $33 per share price of its 2010 IPO.
Five-year GM stock price chart. Source: Tradingview.
Future Outlook for GM
GM employs 164,000 employees worldwide and had a contraction in sales of about 10% in 2019 with revenue of $137 billion on net income of $6.58 billion. The company’s financials have now started to improve since the COVID-19 pandemic began, and the stock currently trades at roughly 19 times its yearly earnings of $4.82 per share.
Due to declines in revenue since 2019, GM suspended its dividend payment for much of 2020. While this may have affected income investors, GM stock was trading at the $26 per share level on March 11, 2020, which is when COVID-19 was declared a pandemic. Since then, the stock has gained over 60%, and many top stock analysts continue to give it a “buy” rating.
Table showing the Trailing Twelve Months (TTM) net earnings per share and Price/Earnings (PE) ratio of GM stock from June 2018 to December 2020. Source: Macrotrends.
Due to the current demand for trucks and other utility vehicles, and considering that the company reported decent third quarter 2020 EPS of $2.83 versus an analyst consensus of $1.47, GM stock could be an attractive investment for the long term. The company announced it would reinstate its dividend of $0.38 per share and will make its next payment on Friday, March 20, 2020, to holders of record on March 6.
Pros of the Stock
Increased Earnings Expectations Reflected in its PE
GM’s stock price currently trades at a ratio of 18.73 times earnings, which would make the stock appear reasonably valued for a major manufacturing firm still making money within the challenged automotive sector. The reason for this is largely due to expectations of higher future earnings for GM as the pandemic subsides.
While GM suspended dividend payments for most of 2020, the company announced it will reinstate the dividend in the first quarter of 2021 and will pay a quarterly dividend of $0.38 per share. This could make the stock a worthwhile purchase for an income-minded investor.
GM reported net income of $4.005 billion on September 30, 2020, which represents an increase of 73.15% year on year. Nevertheless, net income for the 12 months ended on that date was only $3.21 billion, a decline of 63.5% from the previous year’s $6.581 billion. If earnings growth continues at this pace, it would make the stock an attractive buy, although future earnings growth depends on various economic factors and therefore remains subject to change.
Potential Cons of the Stock
Stock Market Risk
The V-shaped recovery in the stock market has taken stocks to new all-time highs. While investors have largely benefitted, the COVID-19 shutdowns continue adversely affecting the economy. While long term prospects appear solid for GM stock, you might want to buy the stock at a lower price after a corrective decline in the market occurs.
Recalls and Lawsuits
In addition to the settlement of lawsuits, the cost of recalling and repairing almost a million vehicles in the company’s latest recall could adversely affect earnings. The latest recall is dwarfed by the previous recall of 7 million vehicles for airbag problems in November 2020.
Higher Unemployment and the Business Cycle’s Top
Relatively high levels of unemployment due to the COVID-19 pandemic probably signal an end to the most recent rising phase of the business cycle and will likely dampen consumer demand for vehicles. This has negative implications for the overall stock market and for the price of cyclical stocks like GM.
How to Buy GM Stock Using a Broker
To buy GM stock using a broker, you need a reputable stock broker that has access to stocks listed on the New York Stock Exchange (NYSE). If you plan to invest in GM stock over the long term and simply want to buy and hold the stock in a broker account, you may want to use a discount broker since you would only pay a modest commission, although you would not get the extras that full service brokers offer.
Some online brokers charge inactivity fees on idle accounts and others offer their services free of charge. Keep in mind that how you buy GM stock is just as important as where you trade, so make sure you pick the right broker.
Step 1: Pick a broker.
Knowing what you need in a broker when you buy stocks will make your choice a lot easier. For example, if you need a bank account and a trading account with your broker, or if you want access to other asset classes, some brokers will be able to fill your needs better than others. Check out Benzinga’s guide on how to choose a broker.
Step 2: Try the trading platform.
Most online brokers provide a free virtual or demo account for you to evaluate their trading platform and practice trading without putting any funds at risk. You might want to open several of these accounts to see which broker’s platform and services best suit your needs.
Step 3: Fund an account.
After deciding on a broker and getting a trading platform, fund your account. While some brokers let you open an account without funds, each broker has different requirements, funding methods and minimums. Check with your preferred broker to make sure you can meet its requirements.
Step 4: Start buying GM stock.
Now, determine the price you wish to pay to purchase GM stock. It usually makes sense to watch the GM stock price for several trading sessions to determine your best entry level to buy your stock. Once you know your price level, you can put in a bid for the amount of stock you wish to purchase.
Is GM Stock for You?
If you have a keen eye for stock market moves, understand economic cycles and have a high financial pain threshold, then GM might be a good stock for you to watch for investment opportunities.
On the other hand, if you want a stock to buy and forget in an account expecting a large return within several years, GM stock might be a gamble right now due to the unusual global economic conditions during the COVID-19 pandemic that have prompted a notable correction in the business cycle and a sharp rise in U.S. unemployment.
Trading cyclical stocks definitely takes some expertise, market acumen and knowledge of the sector, so it’s not for everyone. On the brighter side, GM has recently reinstated its stock’s dividend to provide its investors with some income, which is a plus. Also, if you buy the stock as an investment, you can partially or fully hedge your GM stock holdings using put options, which might make sense in today’s uncertain stock market.
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