On Monday afternoon, the Canadian government announced that it had agreed to sell its remaining shares of General Motors (NYSE:GM) stock -- worth about $2.7 billion at market prices -- to Goldman Sachs in a block trade.
General Motors shareholders didn't take the news well, sending the stock down 2.5% on Tuesday. However, investors shouldn't be worried about Canada's decision to dump its GM stock.
Why the stock might be falling
There are two main reasons that investors might have been unsettled by Canada's decision to sell its GM shares. First, whenever a major shareholder liquidates its holdings of a particular stock, it's bound to raise questions about whether the seller knows something potential buyers don't.
Popular stock pundit Jim Cramer has pushed this line of argument. He argued that while Canada might not want to be a long-term GM investor, it wouldn't sell all of its stock right now unless it thought the automaker's shares had peaked.
A second issue is that this kind of major share sale could depress GM's stock price. Goldman Sachs certainly isn't interested in becoming a long-term investor in GM. It bought the stock with the intention of reselling it to its institutional clients. If a significant number of shares come on the market in a relatively short period of time, the stock price might have to dip to stir up enough buying interest.
This isn't cause for concern
Neither of these issues are particularly worrisome for GM shareholders (especially long-term investors). While Canada might have timed its sale based on GM stock nearing the upper end of its post-bankruptcy trading range, that doesn't mean the stock can't go higher. In any case, looking to a national government for investment advice is a dubious move.
The perceived impact of having $2.7 billion in stock coming on the market is also probably overblown. First, the 73.4 million shares Canada sold represent less than the average weekly trading volume of GM stock over the past three months.
Perhaps more important, GM recently announced plans to buy back $5 billion of stock by the end of 2016. This represents a significant pool of long-term demand for the stock. Moreover, if the stock remains artificially depressed by Goldman Sachs' efforts to resell Canada's shares, this will just provide a more attractive buyback opportunity for General Motors.
What investors should focus on
In the long run, the actions of particular shareholders -- even massive players like the Canadian government -- won't impact GM's stock price. Ultimately, financial performance is what counts.
On that score, things are looking pretty good for GM investors right now. In the U.S., the company's sales rose more than 5% last quarter, driven by strong demand for GM's most profitable vehicles, including pickups and large SUVs. Average transaction prices were up and incentives were down, which should further buoy GM's profit margin at home.
Meanwhile, in China -- GM's largest market by volume -- sales growth rebounded to 8% in March after the automaker's sluggish start in 2015.
In Europe, General Motors has made tough decisions necessary to restore profitability. This includes ending production in Russia and focusing solely on the premium market there, as well as withdrawing the Chevrolet brand from Europe. On the bright side, GM's European Opel/Vauxhall unit has started to make a comeback and is gradually gaining market share.
In short, GM is well positioned for profit growth thanks to strong results in the U.S. and China and a budding turnaround in Europe. Yet GM stock still trades for less than eight times projected 2015 earnings. This doesn't look like a stock investors should give up on.