Barron’s loves to pat itself on the back for its winning stock picks, so it seems only fair to highlight some of its disasters. Such as General Motors (GM). In early June, the magazine fell in love with GM’s Volt tale and hypothesized that the stock might soon zoom from $17 to $30 or even $45.
But everyone who makes stock forecasts spends about half the time eating crow, and, to its credit, Barrons is now doing that. It is also now recommending that investors sell what is left of GM, which is currently trading for $4:
Government help could be prodigious under the new administration, but investing in a company that needs subsidies to survive isn’t a route to long-term success. The most prudent course would be to sell GM shares, lick your wounds, and find a better investment. What once was the world’s biggest auto maker has been turned into a highly speculative small-cap. Its future is effectively out of its control.
When stubborn bulls finally throw in the towel, it is usually a good time to think about buying. In this case, though, we have to agree with Barrons. The market is already expecting that the company will be bailed out: If it weren’t, the stock would be trading for pennies. (As GM itself admitted last week, it will run out of cash within six months barring a huge loan from the government. For all intents and purposes, that means it is already bankrupt).
Thus, the $4 a share of remaining equity value represents a bet that the company will get bailed out, which it probably will. The stock will probably pop modestly on the bailout news–no bankruptcy soon!–but what then?
If the government proceeds with the bailout, taxpayers will be adding another $10-$25 billion of debt or preferred stock to the $45 billion of debt and $45 billion of pension and other benefit obligations General Motors is already carrying. That will put at least $100 billion of creditors in line ahead of common shareholders if and when General Motors is eventually sold (in whole or in parts). If the bailout comes from the TARP, it will also likely include warrants (let’s hope so, anyway). That will mean additional equity dilution.
So the stock decision comes down to this: Do you think General Motors’ will get bailed out? Do you think the bailout will carry it through what it still views as a short-term economic blip to the happy promised land on the other side? Do you think it will soon figure out how to deal with its pension obligations, higher-than-market labour costs, and inability to design cars people want? Do you think its assets are worth more than $100 billion? If the answers to all these questions is “yes,” then, by all means, buy the stock.
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