With General Motors' (NYSE:GM) shares sliding to the lowest point in nearly two decades, value investors may be thinking that now might be a good time to open a position. Stocks that have been beaten down and tossed on the market's junk pile are often good investments. That's how lead analyst Philip Durell finds many of his market-beating stocks for Motley Fool Inside Value. But sometimes it pays to wait and watch. One example: It may still be too soon to move in on GM.
Car makers have been having a rough go of it lately. Without the incentive programs to entice buyers onto dealer lots, sales fell by 11% in October. Ford (NYSE:F) just announced it is joining GM in offering yet another enticement to buyers. Under a "no haggle" policy, customers will see a window sticker on each vehicle stating the single, maximum price, as well as how that price differs from the MSRP. The sticker will also detail any cash incentive offers.
General Motors' new "red tag" promotion will also post a maximum price on the window sticker in an effort to drive more cars off the lot. Its new-car sales fell 23% last month, so the promotion will cover most models under the Buick, Chevy, Pontiac, and GMC nameplates. It's expected that Japanese car makers, such as Toyota (NYSE:TM), Nissan (NASDAQ:NSANY), and Honda (NYSE:HMC), will respond in kind as they continue to wrest market share from the Big Three U.S. automakers.
Promotions are generally looked down upon because they can cheapen brands and eat into profits. That's something General Motors really can't afford these days. It reported a $1.6 billion net loss in the third quarter, and it continues to struggle with high health-care costs.
GM only recently got the United Auto Workers to agree to a major overhaul of health-care expenses; for the first time ever, GM retirees will pay for some of the costs of their medical care.
The company has also seen a decline in the popularity of SUVs, most likely the result of high gas prices. These price promotions will only serve to continue the pressure placed on profits.
These are all reasons that investors will want to remain cautious before moving in. But there are even more. The company announced it had overstated profits by $400 million in 2001. While it apparently understated them in later years, it remains for the Securities and Exchange Commission to step in and see whether the overstatement was deliberate. And, as happens many times when these accounting irregularities show up, more are soon discovered. It's the "cockroach theory" in action: Where there's one, you're bound to find more. Add to that the fact that its parts supplier Delphi has declared bankruptcy, and an investment in General Motors becomes more of a gamble.
There may indeed be a time when a stake in the largest automaker becomes a viable opportunity, but with the company poised for a possible bankruptcy declaration of its own not too far on the horizon, prudent investors should probably stay away from this "disabled vehicle" of a company.
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Fool contributor Rich Duprey owns shares of Ford, but he does not own any of the other stocks mentioned in this article. The Motley Fool has a disclosure policy.
