Should Investors Test Drive GM’s Stock with Warren Buffett & David Einhorn

Jul 23, 2012
J. Webster
Comments Off on Should Investors Test Drive GM’s Stock with Warren Buffett & David Einhorn

Why are two notorious investors placing million dollar bets on General Motors stock? It appears both investors saw huge value in this blue chip consumer stock that has been beaten down since its 2011 initial price offering.

David Einhorn, manager of Greenlight Capital, started buying shares of General Motors in 2011. He made the stock his fourth largest holding in the third quarter of 2011 with 15.17 million shares owned. In the fourth quarter, Einhorn bet once again on the legendary car company by adding to his stake, making a total ownership of 19.01 million shares. This took General Motors stock up to the third largest position in Greenlight Capital. Einhorn did recently take some profits on shares of General Motors. After accumulating the majority of his shares at the $20 mark, Einhorn sold 22% of his GM position at an average price of $23 per share. Despite the sale, Einhorn still owns 14.8 million shares.

Legendary investor Warren Buffett bought into General Motors stock in 2012. In May, it was disclosed that Buffett’s Berkshire Hathaway had acquired 10 million shares of General Motors. News of Buffett’s involvement sent shares up 5% in one day. Speculation has grown that it might not have been Buffett himself who made the purchase, but rather one of his investment managers Todd Combs or Ted Weschler. Buffett doesn’t normally make investments valued at less than $300 million, like the one Berkshire made on General Motors. Buffett did have a hand in Berkshire’s investment in BYD, a Chinese electric car startup. Perhaps Buffett sees big growth in car manufacturers and made the bet himself.

One thing is certain for legendary investors Buffett and Einhorn: General Motors shares are trading at a huge discount to their IPO price. In November of 2010, General Motors took part in one of the top five biggest IPOs ever in the world. GM sold 478 million shares at a price of $33. Shares took off on the open market and were trading up for several days. Shares have fallen dramatically since its IPO, losing value in 2011 and 2012. Shares are now down 43.4% since the company’s IPO.

The United States government is hoping GM stock rises, just like Buffett and Einhorn. The US Treasury offloaded a huge chunk of the shares it acquired by helping bail out General Motors. The Treasury kept a 27% stake post IPO and needs to see shares hit $52.79 to break even on the rest of its ownership. Once the US Treasury is out of ownership, perhaps consumers will shed the name “Government Motors”, which GM has stood for recently.

General Motors is staying profitable by cutting brands and spending. It shed four car brands to focus on its core four automobile brands. General Motors also made a splash in the news by saying it would no longer be paying to have Super Bowl advertisements. With its profits, GM has also been cutting debt payments.

Analysts are calling for General Motors to earn $3.21 in earnings per share in fiscal 2012. The following year, analysts hope GM can earn $4.14. This puts GM stock at ridiculously low price to earnings ratios off 6.0 and 4.7 respectively. GM has also beat estimates three of its last four quarters (+10.6%, -4.9%, +9.6%, +28.3%). General Motors will also look appealing to value investors with its low 0.21 price to sales ratio. In comparison, Ford trades with a price to sales ratio of 0.26, but commands a higher price to earnings ratio. Ford shares trade for 7.0 times this year’s earnings estimates, and 5.9 times expected 2013 earnings.

With price to earnings values at extreme lows and shares down almost 50%, it’s time to take a look at shares of General Motors. Car manufacturers face troubles in Europe but have seen sales in the United States increase. GM is making strides in more fuel efficient and alternative energy vehicles. Buffett and Einhorn get some stock picks wrong, but I think they’re making a smart call here.

Update: Shares of General Motors hit a new 52 week low today of $18.85, on the European slow down and global growth concerns, but have since bounced back to around $19.20.

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