In an improving economy many companies may seem to have a new lease on life. However, the same fundamental analysis that guides all long term investment should apply when investing in turnarounds. If the company is showing a profit it is important to understand where that profit is coming from. Is the company increasing its cash reserves? If it once paid dividends is it paying dividends again? A company that increases cash flow by selling assets may be trimming down and getting rid of obsolete aspects of its business. However, the investor should not be fooled into thinking that this sort of cash flow represents a turnaround. The company needs to be improving products, widening markets, and profiting from sales.

Big companies like General Motors, historically, are dividend stocks, as well as value opportunities. If GM continues its recovery investors should expect to see quarterly dividends resume. They should also expect to see the company’s products start to reclaim market share from competitors. In the case of GM this means Toyota, Ford, and to a lesser degree other automakers. Of course, once this is accomplished, the company in question will have a stock price commensurate with its success. The basic idea of investing in turnarounds is to invest before the turnaround drives the company’s stock price up. A useful clue as to what others with a vested interest think of the turnaround is if the turnaround company can get credit. In the case of GM it secured early on a $5 billion line of credit to assure constant cash flow. And it started making money fairly quickly once it was out of bankruptcy. Considering how tight banks had become in offering credit early in the recession this was a vote of confidence.

Investing in turnarounds is like investing in growing companies. The investor will want to asset how much market penetration the company will be able to accomplish and to what degree it will be able to profitably price its products. In the case of a large company accomplishing a turnaround there will always be a limit to how far it can recover and grow.

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What Fiscal Cliff?

Although investors may be exhibiting fiscal cliff stock worries, families are our shopping for cars in the best numbers since 2008. All global concerns aside the US consumer is buying from General Motors GM, Toyota TM, Ford F, Chrysler privately held, Nissan NSSANY pink slips, Hyundai KRX, and Volkswagen VLKAY pink slips. Many expected the twin onslaught of Hurricane Sandy and the threat of a fiscal meltdown to ravage the US economy and drive down sales and profits across the board. But the proof of consumer sentiment is in sales. People are buying cars in pre-recession numbers. More than a million new vehicles exited the show rooms of America in November of 2012. Although automakers would be pleased to see budget negotiations come to a happy conclusion the American consumer is consulting his own thoughts on the subject and buying cars.

What Are the Numbers?

Picking the Most Profitable

Here is where sound fundamental analysis enters the picture. Whoever sells a lot of cars stands to make more profits. However, efficient manufacturing, low costs of labor and benefits, and innovative products will help auto companies stand the test of time. If you are going to invest in North American automakers you need to know who will do the best job going forward. Two years ago we posed the questions, Is GM a Good Investment? At that time the status of General Motors was questionable. Now the question is whether or not GM especially has learned its lesson, will be able to eliminate waste, will be able to negotiate reasonable labor contracts, and produce innovative products that a wide range of customers want. Toyota replaced GM as the world’s largest car maker, for a while. Then the Japanese car maker proceeded to prove that it was all to human with its brake fiasco and other mishandled issues. Profits certainly tell much of the story. As quarterly financials come out investors who want to invest in North American automakers will want to read and study. However, a more important issue will be the willingness of companies like GM to forego short term fixes like producing huge numbers of big cars. Although big cars led to big profits over many years they were to doom of GM when the economy sank. Look to see who can see the future and plan for it when you choose to invest in North American automakers.

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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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