The Worst Stock for 2007: General Motors

The overhauls just aren't enough to get this automaker running smoothly.

Ryan Fuhrmann, CFA
Ryan Fuhrmann, CFA
Dec 21, 2006 at 12:00AM

I'm sure it seems strange recommending the best-performing stock for 2006 as the worst heading into 2007. Shares of General Motors (NYSE:GM) are up close to 60% so far this year, but for reasons I'll get into, this is not the best selection for new money in 2007, or ever, for that matter. That's because GM is a case study of what to avoid when looking for a long-term investment.

The Motley Fool's Rule Maker investing philosophy is one of the best places to start when considering company qualities that contribute to market-beating stock performance. If you use this approach, you see that perhaps the only thing GM has going for it is a leading brand, with a 2005 market share in U.S. automobiles of about 23%. The problem is, that share has eroded steadily for more than 40 years. GM held more than 50% of the domestic market in the 1960s.

Next up is a category called "mass market, repeat purchase." And just to prove that GM is the textbook case of what to avoid in the market, Rule Maker investing refers to it as the prime example, since cars are not a repeat purchase item because of their high price tags and their ability to keep running for 200,000 miles or more. Well, maybe just the foreign ones can do that.

GM is also laughable in terms of its historical performance, because of its deteriorating profitability, steady loss of market share, and questionable financial direction. It seems that each decade has seen each of the "Big Three" domestic auto makers nearly drive themselves to financial ruin. Rising oil prices in the 1970s allowed foreign manufacturers the first major opportunity to enter the U.S. with their smaller and more fuel-efficient cars. Chrysler -- now part of DaimlerChrysler (NYSE:DCX) -- almost headed into bankruptcy in the 1980s, and GM nearly went down the same road in 1992, after a recession hit in the early 1990s and the company was caught building factories too aggressively.

Big Three fortunes improved vastly with the advent of gas-guzzling SUVs in the '90s, but that first-mover advantage has turned into a curse, now that high gas prices and oversupply are again helping Japanese companies such as Toyota (NYSE:TM) and Honda (NYSE:HMC) make further inroads with their industry-leading fuel efficiency, affordability, focus on hybrids, and lower legacy pension and health-care costs. Ford (NYSE:F) is reeling and just issued $26 billion in debt just to stay afloat, and the domestic giants are again dealing with overcapacity as major discounting and employee-incentive programs have proved a short-term fix to selling vehicles.

So why can't GM figure it out? Why does it allow the likes of Toyota to eat its lunch and steal market share year after year? Good question. If you'd like to weigh in with your opinion, head to our burgeoning Motley Fool CAPS community, where you can also check out what others savvy players think. So far, the collective stance is resoundingly bearish.

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The more dour comments range from "get off this dying horse" to the belief that a "government bailout or bankruptcy is in their future." There are optimists who still surmise that "GM will survive and grow," while others believe that GM's restructuring moves will pay off, and now that Kirk Kerkorian has "bailed out" of the shares, some think that management can refocus on building cars that consumers actually want to buy.

Shares of GM could see more of a dead-cat bounce from recent lows heading into 2007, but I think that without a major shift in strategy, this stock is among the most unappealing of any company out there. In closing, Danger! Horror! Get Out!

Want to go back to the beginning of our Worst Stock for 2007 tournament? Right this way.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.