General Motors: Stock Pickers, Start Your Engines!

U.S. stocks posted another loss on Monday, with the benchmark S&P 500 falling 1.1%, capping what Reuters points out is its "biggest three-day drop since January." Let's keep things in perspective: That three-day drop began with the S&P 500 sitting at its all-time high and has taken us roughly 2.5% lower; year-to-date, the index is essentially flat. This is hardly worrying stuff.

The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 1% on Monday. Meanwhile, although the Nasdaq Composite Index fell 1.2%, the correction in momentum favorites (particularly in the social networking and biotechnology sectors) appeared to take a break, with high-flying names including Facebook and Netflix managing to post small gains on the day. Similarly, the Nasdaq Biotechnology Index rose by half a percentage point.

General Motors (NYSE: GM  ) underperformed the broad market on Monday (the stock's beta is close to 2, after all), losing 2%. I made the case last week that value-driven investors ought to put the shares on their watchlist in the wake of the firm's auto recall. Alternatively, I see nothing wrong with opening a position if your due diligence leads you to agree with me that the shares are cheap -- relative to the market and, very probably, on an absolute basis, too. This week provides more data that bolster the case for GM shares, in my opinion.

We know there is a direct cost associated with General Motors' recall, but that is easier to estimate than the indirect cost in terms of reputational damage and the impact on sales of GM automobiles. In a research note published today, analysts at Citigroup took a look at the impact of headline risk last week, during which new CEO Mary Barra appeared before a less-than-hospitable Congressional committee, using data from a YouGov survey. Their findings? In brief:

The results appear consistent with March data in that consumer perceptions suffer meaningfully on negative headlines but then also recover quickly.

GM shares have certainly suffered meaningfully from this scandal, without the benefit of a quick recovery -- yet. As of Monday's close, the shares have lost almost of a fifth of their value (-18.5%) relative to their 52-week high. Consider that the share price decline from that level, $7.74, is roughly equivalent to wiping out every penny of earnings per share for 2014 and 2015 (based on the discounted value of analysts' consensus estimates) and then assuming earnings resume in line with previous forecasts. That suggests to me that the market has exacted an excessive penalty on the shares. An article published by Bloomberg today suggests that some of General Motors' investors believe the same.

General Motors' shares are significantly cheaper than those of its U.S. rival Ford, and, widening out the set of comparable companies, it turns out that GM shares, which now trade at just 9.3 times the next 12 months' earnings-per-share estimate, are cheaper than those of any other global car company, with the exception of Italian automaker Fiat. I don't say that General Motors deserves to trade on the same multiples, but I do think it deserves a premium to Fiat. Stock pickers, start your engines!

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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8/28/2015 4:55 PM
^DJI $16643.01 Down -11.76 -0.07%
GM $29.00 Up +0.42 +1.47%
General Motors CAPS Rating: ***