I guess it must be rerun season, because once again, I find myself throwing away a stock I heaved into the trash nearly a year ago.
Every week, I single out a stock that has no place in your portfolio. I'll give you my reasons, but I'm no wet blanket. I come right back with three stocks that I believe will generate better returns than the stock I'm discarding.
This week's stock has shed more than 90% of its value since I initially dissed it last summer. That is certainly a healthy win for this column, but I think there is still some more damage to be done for investors foolhardy enough to take it for a spin.
Who gets tossed out this week? Come on down, General Motors
Slam on the brakes!
When I totaled GM last summer, the stock was trading in the double digits. The company had just eliminated its dividend, slashed its truck production, and laid off a fifth of its white-collar workforce.
Why would investors cheer on bad news? Reality eventually caught up with the stock, but now shareholders appear to be running on fumes.
Last week should have spooked away the last of the faithful. Like a gas guzzler, the company has been chugging down bailout funds and waffling on its obligations. Now it will pay for its crummy gas mileage.
GM revealed that it's heading toward a 1-for-100 reverse stock split, after its 610.5 million shares outstanding balloon to 62 billion, assuming the UAW agrees to GM's concessions. The union and the federal government will own most of GM at that point.
Really? Even in the best-case scenario, the lottery tickets that today's shareholders are pocketing will add up to just shy of 1% of the company in the future. The worst-case scenario, of course, is that GM files for bankruptcy, and the common-stock holders get wiped out.
As low as GM's stock has fallen, it would represent a steep $71 billion market cap (before the reverse stock split) if everything goes as planned. That's a lot for a healthy carmaker, and a heck of a lot for GM.
Shifting into gear …
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.
AutoZone
The economy is clearly playing a major role in the sorry state of GM, but in fairness, cars do last longer these days, too. Technology evolves, and so do drivers who tire of being gouged by their auto dealer's service department. Auto parts retailers are the lucky beneficiaries.
AutoZone, O'Reilly Automotive
America's Car-Mart
New-car buyers will be flustered over the next year or two. Their favorite cars may be discontinued. Ownership changes and cost-cutting initiatives may alienate the faithful. The used-car market has held up as a value proposition during the recession, but it may very well endure as a viable choice when big-ticket spending bounces back.
I could have gone with the "no haggle" class act that is CarMax
Sirius XM Radio
This will be a controversial choice, but it fits. If GM and its fellow automakers get out of this lull alive, satellite radio will be a major part of the lifeboat. Just as GM relies on OnStar for monthly revenue, Sirius XM cuts a royalty check for every activated factory-installed receiver. Sirius XM suffered its first sequential dip in subscribers this past quarter, but the post-merger version of this company is refreshingly leaner than you may think. There are debt monsters beneath the bed, but there are too many companies that need Sirius XM to thrive.
Drive carefully, now.
Other headlines from the landfill:
- Garmin delivered another disappointing quarter this week.
- The 1-for-100 reverse split is a classic punch line.
- The key to investing is to avoid value traps.
