Should You Buy GM?

General Motors (NYSE: GM  ) filed for bankruptcy in June 2009. I'm guessing you heard about that. And I'm also guessing you've heard about today's much-ballyhooed IPO.

But GM's IPO brings fresh news and, more importantly, gives us the building blocks we need to answer the ultimate question: Should you buy General Motors today?

Today's action
The numbers behind today's IPO are whopping. One of the United States' largest IPOs ever, GM sold about $18.1 billion in common stock and another $4.4 billion in preferred stock. The U.S. Treasury is cutting its stake from 61% down to 26%, much to the relief of the Obama administration, GM itself, and those of us who aren't wild about our tax dollars being tied up in car companies.

GM's shares popped as high as 9% upward today. A warm reception, but nothing too splashy for such a hotly anticipated IPO. The relatively subdued response from Mr. Market is great news for Uncle Sam, though, as it means underwriters did a good job of pricing GM's shares to the fullest. It would have been a financial disappointment and political nightmare for the Obama administration if GM had left money on the table by underpricing its IPO, leaving Wall Street to sop up much of the spoils.

From zero to $60?
So GM is back on the table for the little guy. Now what? Before General Motors filed for bankruptcy, I was bearish all the way down. And a quote from my Foolish colleague James Early in this morning's Wall Street Journal pretty well encapsulates my long-standing take on GM:

"The only way I'd touch GM is with a cold, dead hand severed from my lifeless body. ... GM has lost more money than it's made for shareholders over its life. If it's proven one thing, it's that it can destroy shareholder value."

But facts and situations change, and today's General Motors isn't the lumbering destroyer of shareholder value that it was two years ago. Yes, GM is still a cyclical business with high fixed costs, questionable internal controls, and a $27 billion pension shortfall. And, yeah, the automotive market remains as intensely competitive as ever with rivals Ford (NYSE: F  ) , Chrysler, Toyota Motor (NYSE: TM  ) , Nissan, and Honda Motor (NYSE: HMC  ) scrapping away.

Those risks and challenges are no joke, but neither are the subsequent changes for the better GM has gone through. Getting a new management team in the door was a great move, as was paring back the size of GM's brand portfolio. GM has also right-sized its cost structure, allowing it to reduce its breakeven U.S. production level from 15.5 million cars in late 2007 to around 11 million today. That leaves GM a far more profitable and much less cyclical business than in its prebankruptcy days. And while GM's European segment is still on shaky footing, GM holds the market-share lead in BRIC countries, including the world's fastest-growing vehicle market: China. Put it all together, and you're looking at a vastly superior, more profitable GM that is well-positioned to cash in an inevitable recovery in new car sales.

The Foolish bottom line
GM isn't a perfect business. Hey, it was bankrupt not all that long ago, after all. Still, for the contrarian willing to get his hands dirty, there's a lot to like in the new GM. I never thought I would say this, but you should give General Motors some serious consideration.

Looking for more stocks to seriously consider? Click here to get The Motley Fool's free report, 5 Stocks the Motley Fool Owns ... and You Should, Too.

Joe Magyer is the advisor of Motley Fool Inside Value, the Fool's flagship premium value investing newsletter service. Prospective members can try Inside Value free for 30 days. Joe has no position in any companies mentioned in this article. Ford Motor is a Motley Fool Stock Advisor recommendation. The Motley Fool has a disclosure policy.


Read/Post Comments (59) | Recommend This Article (55)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2010, at 1:14 PM, MattyCBaby wrote:

    should the new GM be considered a value, growth, or income play?

  • Report this Comment On November 18, 2010, at 1:16 PM, TMFJoeInvestor wrote:

    I'd say value, MattyCBaby, though I suppose you could make a case for growth given GM's prominence in the BRIC countries and the bounce in profitability as a result of the cost-cutting. I'd be surprised if GM paid a meaningful dividend anytime soon.

  • Report this Comment On November 18, 2010, at 1:21 PM, GrumpyOldGuy wrote:

    At best it should be considered a 1 or 2 year play on the lack of taxes it will pay because of the massive losses from prior years. You will probably make some money if you get out before people realize that the UAW and the gov't own large chunks of it and neither one will do what's best for GM, the company.

  • Report this Comment On November 18, 2010, at 1:23 PM, Dow3000 wrote:

    PUMP AND DUMP....RUNNNNNNN

  • Report this Comment On November 18, 2010, at 1:28 PM, jrod87 wrote:

    whats if they went bankrupt again what would happen the shares I bought today???? oh ya I forgot the same thing that happend when GM first went public..if your a buy and hold kindda guy...what happend to those shares??? oh ya forgot they flushed them down the tolite. Fool me once, shame on you, but fool me twice, shame on me! and my idiot broker who actually allowed me to make the trade

  • Report this Comment On November 18, 2010, at 1:39 PM, TMFJoeInvestor wrote:

    @GrumpyOldGuy: I don't think it is any secret that the government still owns a large chunk or that it intends to divest the remainder. The government doesn't want to keep its stake in GM any longer than it takes to get what it deems a good price. And by that, recoup as much of its original investments as possible.

    I agree that this isn't a long-term buy-and-hold kind of situation, though. The exit strategy on GM would probably be a couple of years out from now when new vehicle purchases have substantially rebounded and the benefits of GM's streamlining really start proving themselves on the bottom line.

  • Report this Comment On November 18, 2010, at 2:43 PM, Milligram46 wrote:

    I see GM as a value for now, and if China continues to grow as projected, than growth. But I feel pretty confident that GM is "safe money" in the market. You could do far worse.

  • Report this Comment On November 18, 2010, at 3:00 PM, pondee619 wrote:

    Is anybody keeping track of the money that the Feds are getting from this IPO and seeing where it ends up? Are bonds being paid off? Is the deficit being lowered?Where is this money going and how will it be used going forward? Does anyone have an idea?

  • Report this Comment On November 18, 2010, at 3:37 PM, BMFPitt wrote:

    If it goes over $40, I'm shorting it.

  • Report this Comment On November 18, 2010, at 3:42 PM, dfrizzle03 wrote:

    @ Dow3000

    "PUMP AND DUMP....RUNNNNNNN"

    hahaha, lol. i have never heard that before. but i agree 100%.

  • Report this Comment On November 18, 2010, at 3:53 PM, langco1 wrote:

    this time its mostly chinese and other foreigners throwing their money away on disgraced gm. to many american investors were burned the last time with their obama aided false bankruptcy.once the dust clears the shorts will be all over this stock and send gm into bankruptcy for good. a little payback from the people with the money...

  • Report this Comment On November 18, 2010, at 4:00 PM, cervelorider wrote:

    nope, bought Ford on the dip today instead.

  • Report this Comment On November 18, 2010, at 4:31 PM, singhjp wrote:

    I think GM will be a good buy for nice gains for next 2 years. The fact that the stock didnt jumped exponentially on the first day of the IPO itself shows that under-writers have done a good job. It is rightly priced at 34$ and with good quarterly showings, it will shoot higher. My guess, 55$ in 2012.

  • Report this Comment On November 18, 2010, at 4:34 PM, moorhead1976 wrote:

    I work with GM, and even though the players have changed, the mentality is still very similar. I will not be buying GM stock. Instead I have been eyeing Ford as a potential pick up.

  • Report this Comment On November 18, 2010, at 5:43 PM, zoningfool wrote:

    "Should you buy GM"? IMO--no. The company still has plenty to prove. It will take some time for GM to erase the 'government motors' bailout overhang in consumers' minds. Ford's a better choice.

    What I find amusing is Obama--who never misses an opportunity to blame Bush as the cause of any problems or failures occurring under his watch--today ATB touting the success of the money "my administration invested in GM". Of course the reality is this:

    Dec. 18, 2008--

    "President George W. Bush stepped in Friday to keep America's auto industry afloat, announcing a $17.4 billion bailout for GM and Chrysler, with the terms of the loans requiring that the firms radically restructure and show they can become profitable soon."

    http://www.politico.com/news/stories/1208/16740.html

    Seriously, now--if you're going to pass the buck when it comes to your failures, Mr. President, at least give credit when credit's due--it wasn't just 'your administration' who bailed out GM.

  • Report this Comment On November 18, 2010, at 5:44 PM, atodde wrote:

    How can a stock from a not so long ago bankrupt Co. priced at $35 be worth more than Ford? Which didn't receive any goverment assistance.

    Talking heads.

    I'm keeping Ford and wouldn't buy GM with your money.

  • Report this Comment On November 18, 2010, at 5:54 PM, Gorm wrote:

    Granted, GM had HUGE problems before their failure, but just how does a company in such a competitive (even depressed) market go from losing $1200/car go to earning $3005/ vehicle?

    Just how much drag is there on this company? Between unions, pension drag, Canada and US taxpayers, just how much is left for investors?

  • Report this Comment On November 18, 2010, at 5:55 PM, ibropin wrote:

    I am glad to see most everyone on hear sees this for what it is. I like the quote I would not buy them with your money.

  • Report this Comment On November 18, 2010, at 6:05 PM, Bonefish100 wrote:

    I respect Ford for pulling themselves out of this mess without government help. They didn't dump on their shareholders by going bankrupt. This says something about Ford's management and character. I'll take Ford over GMC any day of the week and I'll keep buying their stock.

  • Report this Comment On November 18, 2010, at 6:10 PM, dharbu wrote:

    I agree with the prior comment; it's hard to believe that Gm went off at double Ford's current price. My money is still on Ford.

  • Report this Comment On November 18, 2010, at 6:29 PM, Oldfool666 wrote:

    I wouldn't buy that turkey with my worst enemy's money !!!

    If I was going to do a domestic auto play, it would be Ford.

  • Report this Comment On November 18, 2010, at 7:15 PM, TMFBreakerRob wrote:

    Two observations:

    1) The degree of anger toward GM is remarkable. I think it would be worth putting that aside and viewing the company's performance with less passion. Like any company, it should be watched, but it could be a good investment. They are rebounding well in the US and (except for Europe) growing strongly elsewhere.

    2) A huge ATTABOY for James Early...for the graphic...and *funny* comment! LOL

  • Report this Comment On November 18, 2010, at 7:46 PM, disegno wrote:

    Everyone is talking about GM as a car business, but the old GM was hugely into financing, and got in plenty of trouble in that area. What's the status of the financing part of the biz in the new GM?

  • Report this Comment On November 18, 2010, at 7:52 PM, TopAustrianFool wrote:

    "Granted, GM had HUGE problems before their failure, but just how does a company in such a competitive (even depressed) market go from losing $1200/car go to earning $3005/ vehicle?"

    Two words: Government subsidies...

  • Report this Comment On November 18, 2010, at 7:54 PM, TopAustrianFool wrote:

    "putting that aside and viewing the company's performance with less passion"

    Without passion or prejusdice I tell you that you should avoid any company for which the govt is part owner. They don't play by the same rules and there is a lot of things you will never be able to understand. Their balance sheet will be worse that a bank's/

  • Report this Comment On November 18, 2010, at 7:55 PM, TopAustrianFool wrote:

    "How can a stock from a not so long ago bankrupt Co. priced at $35 be worth more than Ford? Which didn't receive any goverment assistance"

    The price of a stock is based on the amount of debt/stock issued and the valuation. If you normalize for all of that you will find that GM is worth much less than Ford.

  • Report this Comment On November 18, 2010, at 7:58 PM, TopAustrianFool wrote:

    "If it goes over $40, I'm shorting it."

    Oh God!! You can start shorting it know. Before this time next year GM will be worth half of what it is worth now. Nothing has changed and at some point the govt taz breaks and subsidies will end.

  • Report this Comment On November 18, 2010, at 8:00 PM, TopAustrianFool wrote:

    Last time you got screwed as an investor, and why would you buy this junk bond again I would never know.

  • Report this Comment On November 18, 2010, at 8:02 PM, TopAustrianFool wrote:

    "underwriters did a good job of pricing GM's shares to the fullest."

    I think you are getting a little ahead of yourself. There still time for this stock to fall like the sack of potatoes it really is.

  • Report this Comment On November 18, 2010, at 8:45 PM, Notations wrote:

    An obvious shoe-in for "Short Of The Year."

  • Report this Comment On November 18, 2010, at 8:49 PM, bobcollins wrote:

    For about 20 yrs Ford and GM lost market share. For the same 20 yrs Honda and Toyota gained market share. That's what I think.

  • Report this Comment On November 18, 2010, at 9:23 PM, Notations wrote:

    Just wondering...

    If you owned GM and got hosed the first time, isn't buying it again like remarrying your ex-wife (who took the house, half your stuff and all your money) asking you to "trust me?"

  • Report this Comment On November 18, 2010, at 9:25 PM, rayjay85925 wrote:

    Let me see. My former shares of GM are worthless, then they used some of my tax money to bail themselves out and now they want me to invest in the new GM? These guys are brazen if nothing else! Mr Early is right on. If someone thinks they can make some money off them, best wishes, but I've had enough. I'll stick with my F250. Ford(s) never looked better.

  • Report this Comment On November 18, 2010, at 9:30 PM, akaluna wrote:

    My understanding is when Obama bailed them out the bondholders got zero......so besides shareholders getting taken so did the bondholders. Sometimes history repeats itself. Yes management changed but the UAW did not. Still there collecting dues sending a chunk to political party of choice.

    Oh, and then there is Ford, Honda, and Toyota who most experts that I read build a better product. If you are inclined to buy a Detroit Auto Company , why not Ford?

  • Report this Comment On November 18, 2010, at 9:45 PM, Notations wrote:

    I had a dream.

    I was in Peking, eating American take-out and everything in the stores was labeled "Made In the United States."

    I got into my Chevy Malibu and kept wondering which candidate China is going to contribute to in our 2012 election.

    Is it possible to dream in dyslectic?

  • Report this Comment On November 18, 2010, at 9:52 PM, skypilot2005 wrote:

    The author of this article says, "I never thought I would say this, but you should give General Motors some serious consideration."

    Here is how this story is going to end. GM starts making a good profit until the UAW contract is up for negotiation. Then, they will give future profits and stockholder equity to the G. M. managers and UAW workers. Stockholders are going to be left with nothing. Again.

    end of story.

  • Report this Comment On November 18, 2010, at 10:33 PM, thelostdecade wrote:

    the UAW has owership and so those the big goverment . how much profit those GM has to make ,to pay back just what they got from the goverment bailout ,The government’s $49.4 billion investment in GM will likely net a 72.5 percent stake in the new company – a 1 percent larger share than originally predicted. However, that stake could be reduced to 55 percent, depending on options exercised by the UAW.

    how can anyone say the GM will be profitble.

  • Report this Comment On November 18, 2010, at 10:51 PM, DSquaredInv wrote:

    Bottom line and why I did not pull the trigger on the IPO - none of the money raised from the IPO was going to create shareholder wealth (according to the prospectus). It went to the government and union pension plans. Not a stellar endorsement for investing in a company if you ask me.

  • Report this Comment On November 19, 2010, at 12:09 AM, rashworth wrote:

    Here it is the people who know business are confused about the GM IPO. Why? Because Gov/t intervention is both a fact and a deception. It is hard to put together all the facts. The new GM is new but it has gotten special treatment. It has $49b from US Gov. and it has a $45b in tax credits, too bad for state of MI. Both of those add to the advantages not earned. The CEO has been replaced after he found the gov. hard to work with.

    The profitability is real. The question is can it continue when the Union comes back to collect? Can it continue to be profitable if it catches up on it's pension reliablity.

  • Report this Comment On November 19, 2010, at 12:32 AM, ctdegroot wrote:

    I wouldn't invest in a company I don't trust... and I don't trust GM. I trust Ford, so that's where my money is staying.

  • Report this Comment On November 19, 2010, at 4:11 AM, esotericrajen wrote:

    I am really confused as to what happened with GM, and maybe someone with more analytical skills and knowledge can shed some light into this matter.

    GM went private thereby wiping out all the shareholders who held onto the stock to the end. Now, GM is back and selling those same shares (in my opinion) to shareholders again, at a higher price.

    So, some questions in my mind:

    1) Where did all the original money go?

    2) Where is the new money going?

    3) It this just a case of selling "vapour" to investors?

    I believe in my gut that shareholding is just a matter of holding vapour, because it evaporates so quickly and yet one gets the preception that one is owning a part of a corporation. But, is this true?

  • Report this Comment On November 19, 2010, at 6:29 AM, nivekluap wrote:

    GM makes great vehichles, that's all I own. Ford's stock has room to run....that's all I own because of how they turned themselves around as a business. Won't touch GM stock and probably won't buy another Ford vehichle.

    KD

  • Report this Comment On November 19, 2010, at 6:54 AM, stanlinz wrote:

    Nivekluap...

    You should reconsider that decision. I am with you on never owning another share of GM stock, but as far as owning a Ford product. Drive One!!

  • Report this Comment On November 19, 2010, at 9:48 AM, capnbrian wrote:

    wait wait wait...so gm goes "bankrupt", tells all previous investors to pound sand, their shares are worthless, then comes around with a "new gm" that is "restructured" and "profitable", and your advice is "The degree of anger toward GM is remarkable. I think it would be worth putting that aside and viewing the company's performance with less passion."??!!?

    i think the ex-wife analogy is perfect. trust me, honey, i won't take all your stuff again, THIS time will be different...;)

    a pig is still a pig, no matter how much lipstick you put on it...

  • Report this Comment On November 19, 2010, at 9:55 AM, BioBat wrote:

    It might be an 'ok' investment for the short term when you capitalize on the enthusiasm and let the proper valuation set in but after that, I'd dump GM stock like a hot potato.

    1. GM market share peaked in the 60s and it's been draining ever since.

    2. GM still has huge UAW obligations.

    3. UAW is already talking about how they want in on profit sharing.

    4. The quality of GM cars pales in comparison to Honda, Ford, and even recalled Toyotas.

  • Report this Comment On November 19, 2010, at 10:36 AM, TMFHousel wrote:

    zoningfool,

    I think he was talking about the equity financing his administration invested, as opposed to the debt financing the Bush administration put in -- not taking credit for the whole shebang.

  • Report this Comment On November 19, 2010, at 11:23 AM, jrj90620 wrote:

    Who knows what the new GM is worth.Depends on how good the new management is and if they produce products better than the competition.These are unknowns now.

  • Report this Comment On November 19, 2010, at 11:30 AM, ddepperman wrote:

    There is an article in The New Yorker from a couple of weeks ago. Apparently GM had done most of the hard work of restructuring before the buyout boys arrived. They just may have hurried the process.

    And remember, private equity is gutting America's corporations and making them ultimately less able to compete in world markets. It's good GM had done most of the job first. GM's car quality is almost at parity with the rest. As for Toyota, remember there is some kind of curse of being a number one car maker that brings in complacency and lack of innovation.

    Japan's economy hasn't innovated much for a good long time.

    The US may be in the same boat.

    Why do countries stop innovating?

    Follow the bucks.

    Walll Street, big money is squelching our competitiveness with its stranglehold on the government.

    GM IS a big leader in the China market.

    Now go out and see the movie "Inside Job" for grins, and learn something.

  • Report this Comment On November 19, 2010, at 4:18 PM, Notations wrote:

    Another thought:

    GM Shareholders = Charlie Brown

    GM = Lucy holding the football...

  • Report this Comment On November 19, 2010, at 5:26 PM, DukeGuy wrote:

    I'm gonna wait to hop on board until this unprecedented tax-loss carryover plays out. I really don't see much risk of GM being at $100 in 5 years, or even $50 for than matter.

    While I concede all the good things noted above, I still see a unionized company with slightly inferior products over-diversifying said products and pricing them above competitors.

  • Report this Comment On November 19, 2010, at 8:30 PM, PadiwanJoseViii wrote:

    If folks are concerned about the impact of UAW on GM, why doesn't the same concern apply to Ford? Last time I checked they are a UAW company as well.

  • Report this Comment On November 20, 2010, at 9:29 AM, busterbuddy wrote:

    NO. And NO to UAW for FORD. Buy Ford especially if it gets below 15.72. Suckers buy GM stock. This IPO has been the third robbery. All the small stock holders of large shares of GM who utilized the income for pension got hosed. Now the very bankers who caused it are getting richer by the IPO.

    And the Car Czar who thought it up, "I'm not a crook" just agreed to pay off the NY Attorney General in a settlement.

    Oh what a tangled web we weave, when first we do deceive.

  • Report this Comment On November 20, 2010, at 9:31 AM, busterbuddy wrote:

    NO. And NO to UAW for FORD. Buy Ford especially if it gets below 15.72. Suckers buy GM stock. This IPO has been the third robbery. All the small stock holders of large shares of GM who utilized the income for pension got hosed. Now the very bankers who caused it are getting richer by the IPO.

    And the Car Czar who thought it up, "I'm not a crook" just agreed to pay off the NY Attorney General in a settlement.

    Oh what a tangled web we weave, when first we do deceive.

  • Report this Comment On November 20, 2010, at 9:40 AM, skelator wrote:

    I felt the same negative way about K-Mart as many of you do about GM. I wish I had bought some K-Mart when they came out of bankruptcy. I'm still not sure if I will buy some GM or not ,but there are many perks to being fresh out of bankruptcy that should not be overlooked. IMO

  • Report this Comment On November 22, 2010, at 3:49 PM, TMFPapester wrote:

    I haven't dug into the financial details, but the simple degree of animosity for GM that is being displayed here piques my interest. When people buy and sell based on something other than underlying value, when emotions trump all else, opportunities can be born.

    Certainly worth a look.

  • Report this Comment On November 22, 2010, at 11:29 PM, GreenPhotog wrote:

    Tata, GM, Tata (TTM).

  • Report this Comment On November 23, 2010, at 12:18 AM, NOTvuffett wrote:

    truth,

    When GM's ability to write off losses as if they didn't go through bankruptcy inflates the reported profits, the UAW will demand more. They will say "you are making all these profits now and we made concessions to save the company, we want more".

    Ford on the other hand saw the writing on the wall and planned accordingly. In the end they will probably be punished for it. It is a UAW shop.

  • Report this Comment On November 23, 2010, at 10:15 AM, FutureMonkey wrote:

    No

  • Report this Comment On November 26, 2010, at 10:21 PM, gnawbone wrote:

    I suspect I am but one of millions of former GM customers that have decided on principal that I will never buy another GM product. This company is a Zombie. They lie about having "paid back our government loans with interest" and then they expect me to believe their financials?

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