Many investors have missed out on the early portions of the recoveries of major financial institutions -- recoveries that brought significant gains to investors willing to invest in companies under government ownership. But the largest U.S. automaker could be ready to deliver similar returns as a major catalyst plays out.
When the federal government injected capital into and restructured General Motors (NYSE:GM), it received a 61% stake in the automaker, with the remainder being divided up among other stakeholders. But the goal of the auto bailout was to eventually fully privatize GM again, and the government has been on this path since the IPO of the stock in 2010.
GM hit a new 52-week high on Nov. 13 after reports came out that the government had sold another $1.2 billion in GM stock, reducing the government's stake to around 4%. GM has been majority privately owned for years, so the biggest issue here is the final removal of the last government shares.
As the government exits the last of its GM stake, there could be major benefits for the common stock. Once the share sale is completed, the selling pressure from the government's large stake will be eliminated. Under this measure, as long as buying pressure remains the same, the stock should rise as the government share sales have been temporarily suppressing upward movement by creating a larger supply of shares for sale.
But buying pressure could grow beyond current levels upon a complete government exit. Investors and fund managers that shy away from partially government-owned companies would be able to buy GM shares upon a government exit. Additionally, the final government sale could be a catalyst for GM to reinstate a dividend. This move would both provide income for existing shareholders and attract new income investors and dividend only funds.
An insurance case study
American International Group (NYSE:AIG) became the face of Wall Street bailouts after the injection of billions of government dollars gave the Treasury an AIG stake of 79.9%, which briefly rose as high as 92%. During the government stock sales, AIG shares remained trapped in the high-$20 to low-$30 range.
But after the last of the government shares were sold, AIG shares rallied into the $40 range, moving as high as the low-$50 range in recent weeks. AIG also saw its full privatization as a chance to reinitiate a small dividend, rewarding existing shareholders and attracting some additional dividend-only investors.
How to play
Investors who want to play this upcoming catalyst at General Motors have more options than it first appears. Beyond the common stock and standard options plays, GM has three classes of warrants available to average investors.
GM Class A warrants (NYSE: GM-AW) expire July 10, 2016, and have a strike price of $10 per share. GM Class B warrants (NYSE: GM-BW) expire July 10, 2019, and have an exercise price of $18.33. Both the Class A and Class B warrants were originally partial payment to the bondholders of the Old GM.
More recently, GM Class C warrants have become available, which have an exercise price of $42.31 and expire Dec. 31, 2015. Unlike the other two warrant classes, the Class C warrants were given to the United Auto Workers VEBA Healthcare Trust. Because of these warrants' higher strike price and closer expiry date, they are a more speculative play on GM stock.