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Vinay Singh
Vinay Singh
Articles (229) 

Analyzing Why General Motor is Heading to $40 This Year

June 08, 2014 | About:

There is only so long that investors and the media can scream that the sky is falling before people - namely, GM (NYSE:GM) investors - begin to realize that the sky is not, in fact, falling. Last month, aside from the report that GM was recalling 52,000 SUVs due to a fuel gauge issue, it was also reported that the engineer directly involved in the ignition switch debacle has resigned. In the path to resolving this issue, people accepting blame and taking accountability is right along the meat of the process. Believe it or not - and despite what the headlines look like - this recall issue is moving one more day behind us.

GM stock is really trying to pull itself out of the muck. The real question, from a technical perspective, is going to be whether or not the company uses its 50DMA at $34.75 as support or resistance. With the bearish flag of the 50 DMA crossing through the 200 DMA, it's going to take some momentum for GM to break out to the upside here. $35 and $35.50 are going to provide big resistance points for the stock, as well. Technical traders that see GM in a long-term downtrend off of the $41 mark are going to likely be swinging back around and going short here for the short term.

We'll have to see if we get any headlines out of GM or other U.S. automakers (aside from April's numbers) that could continue to catalyze a move to the upside and put a bid under the company's stock. I think before the end of the year, GM has significant upside potential.

At least in terms of the recall yesterday, Mary Barra seems to be taking a hyper-proactive approach with what she's been given. According to reports:

GM CEO Mary Barra is using the company's mishandling of the switch problem to speed up a revamp of its culture and to a slash a bureaucracy long known for its inertness. The idea is to accelerate decision-making and co-operation between the engineering, marketing and other departments.

Kenneth Feinberg, whom GM hired to explore compensation for the defective switches, has met with Robert Hilliard, a lawyer with over 300 clients who have made wrongful-death or personal-injury claims. However, the sides didn't discuss specific cases or dollar amounts. The meeting took place even as GM tries to shut down lawsuits for incidents that took place before its bailout in 2009

And, Jim Cramer seems to be on the same page as me. It isn't often I like to quote Mad Money, but occasionally Jim and I find ourselves on the same page. He said, on his show, yesterday:

Cramer said he is "tired" of hearing that General Motors is "toast" after recalls over faulty ignition switches. Monday saw a renewed recall, and Cramer would "buy into the teeth" of the newest recall. Cramer owns GM for his charitable trust. When companies make horrible mistakes that generate persistent, negative headlines, they usually provide a buying opportunity. BP (BP) was cut in half after the Macondo spill in 2010, but it has been edging up since then.

GM discussed the ignition switch problem 3 months ago, and there have been 13 deaths in connection with the faulty switches. GM has already lost $5.5 billion in market cap, and the stock has fallen from the $40s to $34. It is possible that the stock has been punished enough, and that it can absorb the loss and rebound, given the fact that GM has been profitable. The issue is "inherently finite," and the stock will eventually stop going down.

And while I don't necessarily agree with the BP comparison (I think there is still real risk with BP), I agree with his sentiments on General Motors. Additionally, on May 1st it was reported that GM was leading the pack in terms of U.S. sales gains for the month of April:

  • General Motors unit sales +6.9% to 254,076 to top estimates for a 5.7% rise.
  • Sales by model: Buick Encore +48% to 4,317; Cadillac SRX +30.7% to 4,547; Chevrolet Corvette +261% to 3,514; Chevrolet Impala +27% to 13,915; Chevrolet Volt +18.5% to 1,548; GMC Sierra +21.4% to 17,246. GM says it ended the month with 85 days' supply of vehicles at 825,805 units. Last month, the mark stood at 83 days' of supply.
  • Retail sales rose 8% for GM, while fleet sales increased 5%.
  • GM says it think it improved market share in the U.S. during the month. Automobile sales in the U.S. showed solid gains in April as Nissan (OTCPK:NSANY), Toyota (TM), and Chrysler (OTCPK:FIATY) all posted double-digit sales growth. General Motors bested estimates with a 6.9% gain, while Ford (F) had a strong pace of truck sales although car sales came in light.

This company continues to turn a profit, continues to expand in China and overseas, and will show growth this coming year in the U.S. auto market. Additionally, Ford's new F-150 proving to be a success is going to say a lot for when GM starts to implement aluminum in its trucks, like it plans on doing in the coming year.

Backed by underlying sales which continue to keep the belly of the beast churning along for GM - I'm sticking with my long position and holding here. I believe once the ignition recall begins to fade away - which will eventually happen - that General Motors stock could be above $40 before this year's end, representing an 18% move to the upside.

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