When it comes to investing, there are few more prominent and successful people than the Oracle of Omaha, Warren Buffett.
Buffett is often cited as one of the progenitors of the buy-and-hold strategy and has frequently used the power of time and compound gains to his advantage. After starting out with close to $10,000 roughly six decades ago, Buffett has transformed his initial investment into what Forbes estimates is more than $68 billion as of this writing.
Needless to say, a business finding its way into Warren Buffett's portfolio creates an almost instant cult-like following from investors to that stock, because investors understand that Buffett is only seeking high-quality businesses that can stand the test of time. In other words, given Buffett's track record of success, following in the footsteps of the Oracle of Omaha and buying "Warren Buffett stocks" could net investors substantial gains over the long run.
Today, we'll take a closer look at one of Buffett's top holdings, automaker General Motors (NYSE:GM), of which he currently owns just shy of 33 million shares, or a whopping $1 billion in value.
Why Buffett is pressing the gas on GM
General Motors might not look like a Buffett stock on the surface, considering its bankruptcy woes during the Great Recession and the company's record-setting years for automotive recalls, but there's actually a lot there for Buffett to latch on to over the long term.
To begin with, General Motors has a rich history in the automotive business within the U.S. that ties it in closely with American heritage. Though Fiat Chrysler's Jeep is viewed by Brand Keys as America's most patriotic brand, it's tough to argue against an automaker that's built cars and trucks for the American public for more than a century. This historical connection allows GM the ability to create a multigenerational connection within families, which can ultimately sustain its sales trajectory over the long run.
Second, GM builds cars that Americans want -- and that's a good thing if you want to buy companies that listen to their consumers. According to the September auto sales update aggregated by The Wall Street Journal, GM leads all automakers in the U.S., with 17.8% market share year to date. Overall, GM has sold more than 2.2 million vehicles in the U.S. through September, a 4.3% increase from the previous year.
The recently redesigned Chevrolet Silverado has been a big reason for this surge, with sales rising nearly 6% for the year to more than 382,000 as of the end of September. Other standouts include the economical Chevrolet Cruze, for which sales are up 6% as well this year to 208,114 units, and the GMC Sierra pickup, with its nearly 9% increase in year-to-date sales to 147,289 units. Add in the Chevrolet Equinox and the Chevrolet Malibu, and GM has five of the top 20 best-selling vehicles from September.
Third, though Buffett buys businesses that he believes could be successful even with poor management teams, Buffett strongly believes in current GM CEO Mary Barra, whom he described as "a real car guy" in an interview with Quicken Loans founder Dan Gilbert. Mary Barra has willingly taken the heat for this year's numerous recalls, regardless of whether or not she's to blame, and has focused GM on further innovating its product line, including Cadillac, which is expected to debut an aggressive new advertising campaign in 2015 focused on value and the sophistication of its brand.
Last, Buffett is known for pressing the gas on stocks when they're depressed by short-term issues, just as GM is now by its record number of recalls. Since the year began, GM has issued a mammoth 78 recalls totaling more than 26 million vehicles. In total, between the costs of the recall repairs and the possible lawsuits stemming from the recalls, GM will likely be facing costs in the billions. The good news is that these costs, and even their implications, are relatively short-term. GM has done a fantastic job of putting its bankruptcy in the rearview mirror, and consumers tend to be very short-minded when it comes to PR crises like the one that GM is experiencing now.
How Buffett could be wrong
Of course, it's important to realize that not even the great Warren Buffett will be right all the time -- just look at IBM this past week as at least some temporary evidence.
I suspect General Motors has to be at least somewhat concerned by Ford's (NYSE:F) resurgence in the U.S., and its rapid market share capture in China and throughout Europe. Ford is the leading auto brand for consumer loyalty according to Polk, and has done an excellent job of providing consumers with cost-effective, fuel-efficient, and sleekly designed automobiles. Furthermore, Ford's F-Series pickup is practically uncatchable, with the redesigned Silverado and GMC Sierra combining for fewer year-to-date sales than the F-Series pickup.
Also, GM's legal ramifications from its more than six dozen recalls are a true wild card. In June, for example, GM was hit with a lawsuit in California that's seeking up to $10 billion for GM car and truck owners for lost resale value on their vehicles for allegedly delaying the recall of millions of faulty ignition switches and hurting its brand. This could wind up being one of many lawsuits that eventually get filed against the company, and even if it doesn't lose in court, the legal expenses could take quite the toll on its profits.
Is Buffett right to hold on to GM?
Although I don't have a crystal ball and can't answer with any certainty, I do believe the Oracle of Omaha is wise to be a shareholder in General Motors. Personally, between Ford and GM I tend to favor Ford a bit more due to its faster growth potential in overseas markets, but I see enough wiggle room for both stocks to head higher.
However, within the U.S. I don't see GM ceding much in the way of market share to its rivals thanks to a number of key redesigns and its aggressive push to redefine its Cadillac brand. There will clearly be bumps along the road for GM shareholders, as this recall mess has made quite evident, but over the long run I can see GM shares, which are currently paying out a premium 4% yield, outperforming the broad-based S&P 500.
Sean Williams is short shares of Tesla Motors, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of and recommends Ford and Tesla Motors. It also owns shares of International Business Machines, and recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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