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Is GM a Good Investment?

Despite expectations of an opening stock price for the GM IPO of $33 the stock opened at nearly $35.50. The question, “is GM a good investment,” seemed to be answered with a resounding, “yes.” The stock rose to nearly $36 within minutes until profit taking took the new General Motors stock down to below $35 by 10 am EST. The stock recovered to near $36 again before starting a steady decline throughout the day. So much for the first day after GM stock returned from the dead. For the long term investor the question is not such much the hoopla of first day IPO sales and day traders taking profits. The question might well be, “What is the first step to investing in GM?”

We ask, “Is GM a good investment,” in light of what brought GM to bankruptcy half a century after it became the world’s largest corporation whose president declared before congress that what is good for GM is good for the nation and vice versa. Is GM a good investment today? Will the days of Alfred P. Sloan, who rewrote the book on how to sell cars, return? Or will the days of his successors continue, the day of those who lost the lead in car manufacturing and flew their corporate jets while the greatest company the world every saw slid into bankruptcy? If you ask yourself today, what is the best investment for my money, should GM show up on your short list?

Almost overlooked in the rush to profit from the GM IPO is today’s so called “Philly Fed.” The Philadelphia Fed index is a regional manufacturing survey whose November number came in the highest since December 2009 at 25 whereas October’s number was a dismal 1. Meanwhile the four week moving unemployment claims average fell to its lowest in two years. We are reminded of another old saw, “As GM goes so goes the nation.” Certainly the GM bankruptcy came at a time when the nation’s economy was in near collapse. No matter how badly a company does at making and selling cars it will do worse when unemployment is 10% and the banks aren’t lending money. To the extent that GM gets its act together and folks have more money in their pockets we could see the old stalwart start to make money again. GM has already paid or has the money to pay the US government $9.5 of its bailout debt. Just that little bit of fundamental analysis tells us that the folks in Detroit are capable of running a profitable business.

Another part to the question, “Is GM a good investment,” is that GM will, by dint of its sheer size, be included in stock indexes such as the Russell 3000 again soon. That fact will mean index funds will be purchasing the stock. Over the long term, however, the company needs to continue its recent performance in which it has had three consecutive profitable quarters. The company has slimmed down its cost structure and is making fewer models. It is selling fewer cars than before its economic demise but is making more money. This attention to the bottom line could be what brings the company back to long term profitability even if GM never again becomes the world’s largest auto maker. Considering that shareholders, in wondering, “Is GM a good investment?” want profits and not hubris that would be a good outcome. In the business of picking new winners in the post recession world a slimmer and more profitable GM could be a good investment as well as a good model for the nation to follow.

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