Worst Stock for 2008: General Motors

Resolve to keep your portfolio healthy: Help us pick the worst stock for 2008.

If I asked you to describe some features of a bad investment opportunity, you might list:

  • High fixed costs.
  • Powerful unions.
  • Heavy regulation.

And I would agree, reader. Those are traits that I typically steer clear of when allocating my dollars.

Call me masochistic, but I like this Negative Nancy game. What are some other descriptors that fit the mold of value-destroying companies? How about:

  • Poor management.
  • Cutthroat industry competition.
  • Sensitivity to commodity prices.

Had enough?
I bet. Typically, we Fools tend to focus on the sunny side of life by analyzing how to juice your returns rather than stem your losses.

But with this series, we're out to help your portfolio avoid potholes in 2008. As the transportation editor, I'm focusing on a company that fits all of the negative traits above. Once the car manufacturer to beat, this poor operator has been famously losing market share to higher-performing foreign competition. If you haven't already guessed, I'm talking about General Motors (NYSE: GM  ) .

And the wheel goes round
Perhaps you're thinking that I'm a bit late to the bearish party on GM. After all, GM's shares are off substantially from the point where Fool contributor Ryan Fuhrmann tagged GM as the Worst Stock for 2007.

I'll admit that my inner contrarian is a bit nervous about kicking a company with this much operating leverage when it's down. Still, I see little to persuade me that GM shares won't continue to backslide.

And while I could rattle on and on about the holes in the long-term GM thesis, two primary reasons lead me to peg GM as a clunker in 2008: economic rough terrain and continued pressure from foreign rivals.

An economic brake-tapping
Few major companies stand to suffer from macro forces the way GM could in 2008. We're talking about a highly leveraged company whose fate swings with that of the U.S. consumer. Indeed, just yesterday, GM CEO Rick Wagoner cited the weak U.S. economy as a concern for the company.

As a manufacturer of consumer durables, GM is also bound to natural resource prices -- namely, steel, aluminum, and oil. Rising iron ore prices could also play havoc with steel prices in 2008. Meanwhile, rising energy prices could simultaneously pinch GM on the cost front and punch its top line in the gut.

A final economic sticking point for GM is the housing market. While obviously it has an impact on GM via car sales, it also directly affects the company through its remaining 49% stake in mortgage-lender GMAC. For perspective, GM took a $757 million mortgage-related loss on its GMAC stake last quarter. GM's woeful GMAC results are a big part of why I'm pitching GM and not Ford (NYSE: F  ) for this dubious Worst Stock honor. The other part? Ford's turnaround has been showing notable signs of life.

This is ouuuuuuuuuuuur country?
Not so much. At least, not in terms of the U.S. auto market. With their superior efficiency and perceived higher levels of quality, foreign operators Toyota (NYSE: TM  ) , Honda (NYSE: HMC  ) , and Nissan (Nasdaq: NSANY  ) have been eating U.S. automakers' lunch for several years running.

U.S. Market Share

2006

2005

2004

2003

General Motors

24.1%

25.8%

27.1%

28.0%

Ford

17.1%

18.2%

19.3%

20.5%

Toyota

14.9%

13.0%

11.9%

11.0%

Honda

8.8%

8.4%

8.1%

8.0%

Nissan

6.0%

6.2%

5.7%

4.7%

Source: Ford 2007 10-K.

The 2008 North American Car of the Year award, which GM picked up this weekend for its revamped Chevy Malibu, reflects GM's drive to improve both the features and looks of its offerings. Still, the above numbers -- all of which occurred during the reign of current head honcho Wagoner -- speak volumes about GM's track record under this regime. Although Wagoner did improve the company's offerings and recently achieved favorable terms on a realigned health-care package with the UAW, his ejection from the driver's seat seems a necessary step before GM can come anywhere near full throttle again.

Could I be wrong?
Sure. If the U.S. economy regained strength, oil prices retreated, and the company's turnaround hummed along in tow, GM's shares could certainly make a strong rebound in 2008.

But I'm not betting on it, and neither should you. Even if GM managed to reverse its steady decline, you're still looking at a bloated, union-bound cyclical. Put your dollars elsewhere, and while you're at it, share your own thoughts on GM with the tens of thousands of investors participating in the investor-intelligence database called Motley Fool CAPS. It's free, Fool.


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