Shares of General Motors (NYSE:GM) had a rough 2014, but two prominent investors are nonetheless sticking with the automaker. Warren Buffett and George Soros each recently added GM shares to the portfolios of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) and Soros Fund Management.
But are their buys enough reason for average investors to grab some GM shares?
In their latest quarterly SEC 13F filings, Buffett and Soros reported they increased their stakes in General Motors by 1 million shares and 412,438 shares, respectively. Soros also added 316,000 GM call options. This makes them among GM's largest shareholders, and certainly the best known.
For his part, Buffett is bullish on Detroit and considers GM CEO Mary Barra to be "a real car guy." The Oracle of Omaha has added to his GM stake in each of the past few quarters and now holds over 2% of the automaker.
But Buffett and Soros have approached GM differently. While Buffett has accumulated shares a few quarters to build his stake, Soros has been buying and selling GM shares at different times. Consequently, following Soros position would not be feasible for average investors since his buying and selling occurs more frequently than Soros' reports his activity.
Buffett and Soros also have both kicked the tires on auto dealerships. In late January, Soros' assistants were reported to be looking at dealerships for a potential acquisition. Buffett has gone even further by purchasing the Van Tuyl auto dealer chain in October.
It's clear both of these investors are interested in GM and auto sales in general, but another investor is entering the picture and could shake up the company. Harry Wilson represents private equity investors holding about 2% of GM and is pushing for an $8 billion stock buyback. It appears Wilson and the private investors have tired of GM maintaining a "fortress balance sheet" of $25 billion in cash while shareholders see low returns.
General Motors management has taken issue with the share repurchase proposal, but Wilson has not backed down. Buffett and Soros bought their shares before Wilson's activist push began and have not voiced opinions on the matter. Investors should look for any comments from Buffett and Soros as they could influence the results in a potential proxy battle.
If successful, Wilson's buyback proposal could be a catalyst to push shares higher. However, implementing this buyback would make GM a riskier investment as it would have less cash available in the event of an economic downturn.
Valuation and dividends
While I don't think the average investor should blindly follow the buys of billionaires, the factors that attracted Buffett and Soros to GM should appeal to many investors.
The first component is valuation. At 8.3 times estimated 2015 earnings and 7.8 times estimated 2016 earnings, GM trades well below the market average while demonstrating growth in earnings.
The automaker also pays a healthy dividend of 3.8%, well above the market average. These two factors together make GM a investment worth looking at from a dividend value perspective.
Last year, GM shares were held back as the company recalled millions of cars. The most obvious cost of the recall was the quantifiable financial one which GM has announced has come to $4.1 billion so far. Out of the total costs, $2.8 billion came from repairs with almost all of the remainder coming from compensation fund payments and a charge taken for future recall expenses. For 2014, GM still managed to turn a profit and the recall issues do not appear to have threatened the automaker's solvency.
While the recalls did generate negative publicity, sales at GM continued to rise. This mirrors the pattern of other major automaker recalls including the Toyota (NYSE:TM) acceleration-related recalls. In both cases, the companies incurred negative publicity and fines but endured no long-term impact on sales.
With most of the recall expenses being one-time items, they should taper off for future years. At the same time, investor concerns over the recalls should diminish and boost the valuation of GM shares.
The GM sales picture is also positive, with 2015 already off to a good start. Year-over-year January sales were up 13%, which has led industry analysts to forecast stronger overall 2015 sales.
The automaker also expects to turn a profit in Europe by 2016. After losing billions on the continent over the past several years, turning Europe profitable would boost GM's bottom line.
Investors can also look to China, where the automaker is posting double-digit sales growth and is investing $12 billion in five more manufacturing facilities to address the market. With one of the largest market shares in China, GM is also a play on emerging markets growth, with China poised to drive the automaker forward.
Buffett and Soros are bullish on the auto industry and have been buying GM shares to get exposure; however, Soros does a lot more buying and selling which draws into question whether he is actually bullish on GM for the long-term or just interested as a trade. But GM also has much to offer average long-term investors, including a 3.8% dividend, a low valuation, worldwide sales growth, and a potential for multiple expansion as recall concerns subside.
Personally, I am bullish on GM, and agree with Buffett's position as a long-term investor. Could it be a good fit for your portfolio? You decide.
Alexander MacLennan owns General Motors Class B warrants and General Motors Class C warrants. The Motley Fool 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.