It's a pretty crazy time for automotive industry investors, and it seems like everyone has an opinion on whether you should buy shares or run for the hills. The world's most profitable automotive market, North America, is plateauing, and emerging markets are notoriously less profitable. The future of smart mobility projects, driverless vehicles, and electrified vehicle fleets will be lucrative down the road, but investors aren't sure what companies will prevail and capitalize on such a future. Now, one of the world's best investors is selling serious amounts of General Motors (GM -0.05%) stock. Should you follow suit?
Who's running for the hills?
If you're a General Motors investor, you likely remember the tussle between the company and David Einhorn at Greenlight Capital (if not, we'll cover that in a second). At the end of the second quarter 2017, Greenlight Capital owned nearly 55 million shares of GM and it accounted for more than 30% of the fund's holdings. During the third quarter of 2017, Greenlight Capital sold off 37% of its GM stake, followed by another 26% during the fourth quarter.
Image source: General Motors.
Part of the reason behind the stock sales is likely due to GM rejecting Greenlight Capital's proposal to split GM shares into two classes. One class would be for dividend seekers, and another would be for those looking to capitalize on potential GM share-price gains. In essence, the idea was to increase the valuation of GM by giving two very different investors exactly what they want (remember, at the time GM traded at a paltry six times earnings). The automaker declined the proposal and went about executing its strategies to become more profitable.
What to consider
Before you decide if you're team Einhorn, or team long-term GM, there are a couple of things to consider. We'll have to wait and see if Greenlight Capital unloaded another pile of GM shares during the first quarter 2018, but as of the end of 2017, the fund still had nearly 26 million shares. Sure, that's less than half of the 55 million it had around the time it was discussing the share class proposal, but keep in mind it's still the fund's largest holding at 19% of the portfolio.
Another factor to consider is simply how management has improved its business. GM has exited Europe, where it lost roughly $20 billion since 2000, and plans to evaluate other profit black holes going forward. It improved the quality of its vehicles, focused on more profitable segments, polished up the balance sheet, and improved its operations. The company created a smart mobility brand, Maven, to explore new streams of revenue from projects such as ride-sharing and car-sharing, among others. It's invested in ride-sharing company Lyft and acquired companies such as Cruise Automation to bolster its research and development of driverless vehicles. GM is arguably more forward-looking and better-positioned to thrive than it has ever been.
What's an investor to do?
While Greenlight Capital may have sold shares because Einhorn believes GM won't improve its valuation without implementing its proposal, the truth is GM's valuation will likely improve for different reasons. One reason its valuation will increase is when management proves the automaker can survive typical downturns in the auto sales cycle -- and investors have reason to be skeptical until it does. Another reason the valuation could improve is if GM proves it can become a leader in driverless technology and products, and that it has a plan to capitalize and monetize such developments. Finally, if GM hits a home run with one of its smart mobility projects, that could change its valuation overnight.
So one of the world's most famous investors is selling GM. Should you? No, not if you realize and believe the following: That GM still represents Greenlight Capital's largest holding, despite the split stock disagreement, and if you believe GM can weather cyclical downturns while capitalizing on the future of smart mobility and driverless vehicles.
