Investors Dump General Motors Shares Over Recalls

General Motors and other automakers are in the midst of recalls, but which one is suffering the most?

May 26, 2014 at 7:31AM

General Motors (NYSE:GM) has been under heavy pressure lately due to its massive recall related to ignition switches. As a result, several fund managers have dumped the stock in the last couple of months.

On top of that, General Motors issued another recall of over 2 million vehicles for brake lights that were not working properly. Ford (NYSE:F) and Chrysler, now a division of Italian automaker Fiat (NASDAQOTH:FIATY), have issued recalls recently as well, but the degree to which they have suffered from them varies. Moreover, these U.S. automakers could see market share erode and gained by Japanese automaker Toyota due to the recalls.

Some buying and some selling for General Motors
Warren Buffett's Berkshire Hathaway sold 10 million shares of General Motors, cutting its stake to about 30 million shares valued around $1 billion. Hedge fund manager David Einhorn's Greenlight Capital totally liquidated its stake in General Motors, selling around 17 million shares valued at just short of $700 million. Eton Park Capital Management sold over 2.5 million shares of General Motors, liquidating a position of over $100 million. Finally, famed investor Leon Cooperman and his firm, Omega Advisors, sold their 1 million-plus shares for over $40 million. Berkshire and the other funds must be souring on General Motors due to the recalls and the decaying safety culture at the company.

Other funds actually took positions in General Motors in the last couple of months in lieu of all the selling. David Tepper's Appaloosa Management increased its stake in General Motors to just shy of 8 million shares for a value of $270 million. Hayman Capital Management, run by Kyle Bass, raised its holdings in General Motors over 50% to over 7 million shares valued at $240 million. Moreover, hedge fund manager John Paulson upped his General Motors position to 4 million shares.

Therefore, institutional buyers as a whole were sending mixed signals on the prospects for General Motors. All of them are successful in their own right, so it is hard to discern which camp you should side with. The number of shares held by institutional investors actually increased to 17 million despite the selling. However, the value of those holdings, affected by the recall's effect on the stock price, dropped by more than $3 billion.

Fallout from the recalls
General Motors was ordered to pay a $35 million fine after the government found the company negligent in handling its recall for bad ignition switches in some of its vehicles. On a financial basis, the $35 million fine is minuscule, but the company could see fallout from a damaged reputation affect future sales of its vehicles. Therefore, investors will have to monitor General Motors' sales in the coming months to see if they suffer a decline. The fine does not heavily affect the automaker's financial position, however.

Although the government fine is small, General Motors' internal costs for the recall are significant. The company has amassed $1.5 billion in costs for the recall up to this point. This amount is most likely the vast proportion of the recall's costs, but as mentioned previously, the company issued another recall related to brake lights. The costs for that recall could pile up fast and affect the company negatively. Investors in General Motors should monitor that recall closely for any substantial consequences.

Ford's recall is in its preliminary phase, so the costs associated with it are not clear at this point. Nonetheless, Ford investors should monitor the situation closely. The recall is related to software problems and door defects in over 750,000 vehicles. The software problems affect the deployment of the airbags in the cars, so investors must watch closely to see if the problem led to any deaths like the General Motors ignition switches did. Fortunately, the defects have not been linked to any fatalities at this point .

Chrysler was forced to recall 780,000 minivans due to a window issue in which the switches for the windows overheat. Fortunately, the overheating defect is not tied to any injuries or deaths at this point. Like General Motors and Ford, however, Chrysler could possibly see negative effects from a recall even if it proves not to be harmful or is otherwise insignificant.

Foolish takeaway
Recalls can hurt an automaker's reputation greatly. Investors of General Motors, Ford, and Fiat Chrysler must monitor these recalls carefully and the resultant sales figures that succeed them. Moreover, Toyota could take market share from its U.S. competitors that are suffering from lagging sales or reputation-harming recalls. Toyota's investors may benefit from the problems affecting the U.S. automakers. Now is the time to watch your auto investments closely and perhaps make a change into automakers with more stringent safety standards.

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Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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