The new-for-2014 Chevrolet Corvette has been just one of a string of well-reviewed new products for post-bankruptcy GM. Source: General Motors. 

General Motors (GM) has been a mixed bag for investors since its return to the public markets in 2010. 

Wall Street was high on GM as 2011 began, with the stock trading close to $40. But those sentiments soured by the end of that summer, as sluggish U.S. sales and worries about GM's pension obligation dragged shares down more than 40%.

But its stock recovered as new products showed convincing improvements and generated steady profits. Late last year, the U.S. government sold its last GM shares, and investors were beginning to believe that GM's new management had the company on the right track. 

Shares were again around $40 as 2014 began -- only to fall back to the low $30s as GM's costly recall scandal erased most of the company's profits for two quarters in a row.

Do GM investors have any reason for hope? 

While there's no guarantee that GM's stock will recover its lost ground, there are reasons to think that the General's shares could rise in time. Here are three of the most likely.

Reason 1: The recall scandal will pass

Last winter's disclosure that GM had waited years to recall millions of vehicles with defective ignition switches shattered what little public confidence was left in Old GM, the company as it existed before its 2009 bankruptcy and restructuring.

GM's recalls of millions of older models, like this Chevrolet Cobalt, for ignition-switch defects has snowballed into a costly scandal. Source: General Motors. 

But New GM is a different beast -- or so CEO Mary Barra has been trying to tell us. The company's sluggish initial response, coupled with evasive answers from Barra and her minions before panels of angry Congresspeople last spring, didn't help her case.


But eventually, GM got with the program:

  • GM hired a prominent outside lawyer, Anton Valukas, to lead a comprehensive investigation -- and made his (scathing) report public.
  • The National Highway Traffic Safety Administration hit GM with a $35 million fine, the largest it had ever levied -- and GM paid without argument. 
  • GM issued recall after recall through the spring and into summer, eventually recalling over 29 million vehicles in what was obviously an effort to make sure nothing else was hiding in the company's closets. 
  • GM agreed to U.S. government supervision of its internal safety processes, and appointed a senior engineer, Jeff Boyer, as GM's first-ever vice president of global vehicle safety to oversee safety issues.
  • Acknowledging that the terms of its bankruptcy allowed it to escape liability for accidents that happened before 2009, but saying that it wanted to do the right thing, GM established a fund to compensate anyone injured (and the families of those killed) in accidents related to the ignition-switch defect.

More fines are possible, even likely. Toyota ended up paying $1.2 billion to settle criminal charges related to its own 2009-2010 recall scandal. GM is likely to face similar charges, and a similar (or larger) settlement is likely.

But Toyota's example is instructive. The company's reputation was clobbered by that unintended-acceleration scandal -- for a while. But it has long since recovered, as have Toyota's sales and profits. 

GM will almost certainly recover, too. And as soon as GM investors have a clear picture of the total costs of this mess (including any fines or settlements yet to come), the company's stock is likely to rise.

Reason 2: GM's fundamentals are still solid

Recalls aside (and yes, that's a big aside), GM is having a pretty good year, and its longer-term plan is mostly on track.

GM's U.S. sales have been just so-so this year, but that's also true of rival Ford. Analysts agree that the recall publicity doesn't seem to have done significant damage to GM's U.S. sales.

But despite sluggish overall sales, GM's profits in North America have been rising because its margins have improved dramatically.  

Sales of the new-for-2014 Chevrolet Silverado have been so-so, but average transaction prices -- and profits -- have been very strong. Source: General Motors.

That's a result of GM's new and much-improved products. Two of GM's best-sellers, the Chevy Silverado and GMC Sierra pickups, were all-new for 2014, and much improved. Those improvements have led to much stronger average transaction prices, as GM has been able to reduce its incentives (and as buyers have gravitated toward the more expensive configurations that GM emphasized in its redesign). 

We've seen that story repeated across GM's lineup. The big Chevy Impala sedan is miles ahead of the model it replaced; sales, reviews, prices, and profits have all been very strong. GM's big SUVs, redesigned alongside its pickups, have also seen strong sales with very good pricing. Chevy Tahoe sales are up over 18% through August; its upscale siblings, the GMC Yukon (up 59%) and Cadillac Escalade (up 43%) have seen even greater gains. 

And GM isn't just selling gas-hogs nowadays. The subcompact Chevy Sonic is up over 11% in 2014, handily outselling Ford's Fiesta, Toyota's Yaris, and Honda's all-new Fit. And the small Buick Encore SUV, a near-twin of Europe's hot-selling Opel Mokka, is up 65% so far this year.

Meanwhile, GM continues to keep pace with the market in China, where it is investing heavily in expansion -- and its European turnaround, once thought to be a hopeless project after years of huge losses, is showing signs of real success.

These fundamental strengths are a big part of why GM's stock hasn't fallen further despite the recall mess. As that mess starts to fade in the rearview mirror, those fundamental strengths should help the stock rebound.

Reason 3: GM's growth story is still mostly on track

A year or so ago, the case for investing in GM boiled down to these four points:

  • New management was emphasizing margins over market share, and had imposed long-overdue financial controls and discipline on the company.
  • Improved products would likely lead to improved profit margins.
  • Restructuring in Europe would turn a chronic source of losses into profits by mid-decade.
  • GM's effort to turn its long-neglected Cadillac brand into a global luxury contender would pay off with more improvements to margins (luxury vehicles have higher profit margins than mainstream products).

We've seen plenty of evidence for the first three points over the last year. GM does have much tighter controls than it did even a few years ago, and the recall mess has helped Barra drive changes that have tightened things further. GM's margins in North America would have risen to an impressive 9.2% last quarter had it not been for the recall costs, and they may rise further. And GM Europe has strong new management, sales are rising, and costs are coming under control; the turnaround appears to be on track.

The new-for-2015 Cadillac Escalade features an impressive leather-swathed interior. Reviews and early sales have been very strong. Source: General Motors.

Cadillac is the only one that is raising some questions. As of this time last year, Cadillac's U.S. sales were up 31.5%, but so far this year they're down 4.7%. The brand's sales in China continue to grow rapidly, but Cadillac still lags far behind the German luxury leaders. BMW, Mercedes-Benz, and Audi together have about three-quarters of China's hot luxury-car market; Cadillac is hoping to have 10% of that market by 2020.

Why isn't Cadillac doing better? In part it's a product problem: Luxury SUVs and crossovers have been in higher demand this year, sedans less so; but Cadillac's latest models are mostly sedans. The big new Escalade is selling briskly, and Cadillac's midsize crossover, the SRX, has done OK in 2014 despite being near the end of its life (a new one is due next year). 

But right now, Cadillac lacks an entry in the white-hot compact luxury crossover segment. There's one coming, but not for a few years.

There's also another problem. While Cadillac's products have improved, its image hasn't kept up. The latest Cadillacs shine in comparison tests with German rivals, but many owners of German cars aren't taking the new Cadillacs as serious alternatives yet.

That's a marketing problem, and it may take years to fix. But there's reason for optimism: GM recently hired a new boss for Cadillac: Infiniti, and Audi, veteran Johan de Nysschen. 

De Nysschen and Cadillac marketing chief Uwe Ellinghaus, a BMW veteran who joined GM late last year, are expected to make significant changes in the brand's marketing -- soon. GM has hinted that a major new Cadillac advertising campaign will debut early next year.

It may take them a few tries to find the right formula. But Cadillac now has the products to compete with the Germans, with more on the way. Now that it has executives who should be able take the brand's image to that level, investors can have more confidence that this part of GM's growth story will play out as expected.