The stock has been hit by potential problems with the batteries in the Volt, the Chevy electric car. If you can do second grade math, your response should be “who cares?” For every 1,000 cars sold by GM, one is a Volt. Maybe that number goes to two in one thousand in 2013. Wall Street’s reaction to the problem is nothing short of the madness of the trading crowd.
The emphasis on the Volt was born during the financial bailout of GM, to make taxpayer support for saving the company more palatable. The company has morphed this advertising focus to appeal to “green buyers.” These are buyers who may not realize that the worst thing for the environment is an electric vehicle since they produce far more pollutants than hydrocarbon based vehicles.
So it is not surprising when a potential problem like the batteries catching fire hit the Volt, GM stock took a hit.
This thirty day chart says it all – the stock has been hit and has stabilized. It is ripe for the short term and the long term.
It is the long term that intrigues me.
People in the US are not paying mortgages – 12%-13% of them. They are paying off credit cards so they can use them again. And they are buying cars because they need a car to get to their next job or job interview. The average credit score required by a car buyer to get a loan of some sort has plunged – both my sons sold new and used car this past summer and said they sold a car to someone with a credit score lower than 480. You typically cannot finance buying a pet gerbil with that kind of score.
The ability to buy is there.
So is the need to buy. The average life of a car on the road is 10.6 years. More than double what it was when I was a wee lad, and trading in a car getting seventeen miles a gallon for one that gets thirty per gallon saves about $2,800 per year in gas for the average American, and even some pickup trucks get gas mileage in the mid twenties. A new car also eliminates maintenance costs for a while and makes a new car not just affordable but desirable.
The proof can be seen at the GM truck assembly plant in Flint Michigan. I took a tour there at end of September and the plant had just gone over to three shifts. The workers were turning out the Chevy Silverado line and GMC pickup trucks as well. The plant, simply put, was maxed out.
The question going forward is will auto demand hold up? I say yes. I believe we are entering a double dip recession, perhaps just stagnation, but sales have climbed under worse economic conditions over the past 18 months.
Will people buy American? I am a Chevy customer – Tahoe, Suburban, Tahoe, Blazer, Blazer and Traverse. And when I go back and talk to the sales people, the product line is working, bringing in buyers they have not seen before. That started with the shortages on competing car lots created by the tsunami in Japan earlier in the year.
The company is now configured to make money if 10-11 million cars are sold in the US. That number may hit 12.6 MM by the end of 2011. New workers get paid $17 an hour plus some benefits. Older workers get paid more than twice that and over time hourly labor costs are shrinking with every retirement, although there are union negotiated quotas on how many “cheap” workers can be hired during any contract term.
Bottom line: For the first time in more than two generations, GM does not have too much excess capacity, hourly average labor costs have declined and demand is being driven by its products. I’d say that’s an early Christmas present.
Why GM and not Ford? I like Ford as well (I own Ford stock), long term, but right now the Volt problem has made GM stock very affordable. But for those of you who like to trade short term and invest long term, GM is also a short term trader’s dream. There are weekly and monthly options on the stock, the prices for calls are excellent and you can sell them every week or month. You can average down your position and use the cash for income and reinvestment. Or, you can turn GM into a high dividend play – selling calls in this fashion can yield you up to 15% a year.
Why now? The Volt batteries have done their damage and the stock has held firm at or slightly above $20 as shown in this one year chart. If you look at a three year, it tells the same thing with a very strong floor at $20.
Risks? There are always risks and the risks to the stock are more about the stock than the company. GM now has a very large presence in China and the growing weakness in China is scaring some analysts – and that fear could hit the stock but even a big downturn in China should, in my view, have a muted impact on GM’s financial performance.
If you are looking for an early Christmas present, GM is a good buy now.
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