Thursday, November 18, 2010

Should you buy the new GM Stock?

Long known as a purveyor of fine automobiles, General Motors is poised to take off with a new generation of.. oh, wait, I forgot.  They sell shit.  Always have, always will.

The media is hyping the snot out of the GM initial stock offering today, and many folks are thinking they want in on this deal.  And it may be a good deal, maybe not.  But I'll take a pass, and let me tell you why.

1.  Stock Picking is for Suckers:  Whatever knowledge we bring to the table, someone else who is a professional in this field has far more.  So we buy GM stock thinking it is a "good deal" because they "made a profit" but have no idea what that works out to in terms of P/E ratio or whatever, because we don't really have realistic access to the numbers.  We are buying stock based on indicia other than its financial value, which is never a good idea.

2.  GM's problems aren't over - by a long shot:  Domestic automakers are doing OK for now, but two things are looming on the horizon that could wipe them out: Cheap cars from China and cheap cars from India.  Like with the Koreans before them, and the Japanese before the Koreans, Americans like to make fun of Chinese and Indian cars as tinny pieces of junk.  And perhaps they were, but they are catching up fast.  And it doesn't take long to catch up, either.  Korea is a prime example of how a county can go from making second-rate knock-off Mitsubishis to making world-class BMW-beaters, all within a generation.  When China and India decide to tackle the US market, expect to see sub-$10,000 cars causing headaches for the big-3.  And by the way, both Land Rover and Jaguar are already owned by Indian automobile concerns.

3.  The Myth of GM quality is just that:  People like to go on and on about the supposed quality of GM products - either today or in the past.  But having lived with older GM products, I can tell you they were poorly assembled rust-buckets for the most parts and hardly engineering masterpieces.  The basic design of the American car has not progressed significantly in 40 years.  The Escalade of today is just a full-sized Chevy of 1955, down to the engine and transmission.  And despite the hoopla you hear about how great the "classic" GM cars of the 50's and 60's were, they were depreciating, rusty nightmares back in the day, with most going to the junkyard in 8 years with 80,000 miles on the clock.  That is the REALITY of the "good old days".  Newer vehicles are not much better.  The Chevy truck is largely just a big empty steel box, lined with cheap plastic.  Not hard to make, nice profit margin, but not really a quality ride by a long shot.

4. Joe Blow is in on the deal:  When the grocery clerk is buying stock, it is time to get out of the market.   It was true in 1929, it is true today.  When uninformed citizens - amateur investors - get in on a deal, they drive up prices beyond that what educated people would pay.  We saw this with the IPO's of the 1990's and we will see it with the GM offering.  Ordinary citizens are attracted to this deal because it is a brand name they recognize, and of course it is being hyped all out of proportion in the media.  So every Johnny Lunchbucket on the planet will spend $3000 buying 100 shares of the new GM stock, driving the price up further - because they don't want to "lose out on the big deal" they read about in the press.  Again, when a stock pick is touted on television, it is probably too late to get in on it.  One or two people watch TV besides you.

Will GM be a good deal?  Perhaps.  The day-traders will crow about how the stock jumped from $33 to $35 a share during the first hours of trading.  But that is really nothing to crow about.  When the owners of the company think it is worth $33 a share, why would people pay $35 a share?  Once the fascination with the idea dies down, will the share price continue to hold?

All I can say is, that for me personally, buying GM stock is buying a pig in a poke.  I would be buying the stock only based on the brand name, the hoopla, and the idea that the market valuation of the share price is an accurate one.  All three are horribly bad criteria for buying a stock.

While GM might look "sexy" to some, because of brand awareness, the best stocks out there are often in companies you've never heard the names of.  And therein lies the problem for the average Joe Investor.  Consumers, when they buy stocks, tend to pick stocks for companies whose names they have heard of, or whose products they have used.  Few of us would invest in an obscure mining supply company, even though its profit margins may be fat and the share price is doing well.  We don't know enough about the stock to make a choice, so we stick with known quantities - consumer brand names.

As one helpful reader pointed out, stock picking for the consumer is really idiotic.  You and I do not have the time and expertise to evaluate stocks individually and evaluate what their real worth is.  When an individual buys stocks, they really are gambling - placing bets at the casino.  And unfortunately, the casino pays off just enough, once in a while, to make us think we can win at the game.

It is too early to tell whether GM stock will be a good deal.  When the market opened today, the price shot up to nearly $36.  However, in the hours since then, the volume dropped off dramatically, with the price dropping below $35 briefly, and then climbing slightly higher.  If you bought right after the market open, and paid $35.80 you are already up-side down on this stock, as it may be worth 20 to 40 cents a share less than you paid for it, already.

This is hardly like the good old days of the dot com IPOs, where stock prices doubled in the first few minutes of trading.  In fact, it is a pretty average IPO, as things go, with the stock trading for slightly more than the offer price.

While it may hold its value for the time being, I doubt anyone will bid the stock over $40 a share or anything crazy, anytime soon.  If you didn't buy GM stock this morning, I doubt you missed out on the deal of the century.

Meantime, I still have my shares of Motors Liquidation Corp, now worth a staggering 18 cents a share.

Wanna get in a good deal?  I'll sell 'em to ya!

GM Stock ended the day only slightly up from its offering price, which is not unexpected.

Update:  At the end of the day today, the stock settled just above $34, which is not a lot above the initial offering price of $33 a share, or about a 3% gain.  This is well within statistical variation from the original price, and tells us that the company correctly valued the stock in the IPO - or at least investors pretty much thought so.  If you bought at $35 a share at 10:02 AM, I am so sorry.

(By the way, this illustrates the problem with IPOs.  If I went on E*Trade this morning and entered a "buy" order for GM stock for 100 shares, I would have spent $3575 plus a $9.99 trading fee, as my "market order" would have been filled shortly after the IPO went public.  Insiders and institutional investors all got in at the $33 a share price.  Little guys like me bid up the price on shares that were bought merely moments before and flipped for a quick profit).

One reason I am not bullish on the stock is that the prospect of great profits from this company are slim.  Yes, they have cut nearly $5000 from the cost of each car, mostly by slashing labor and benefits costs.  But manufacturing consumer goods is a business of margins - if you have a large profit on a consumer product, it is only an enticement for someone else to enter the business and sell the same (or similar) product for a dollar less.

Without a compelling product line and "must have" features, there is no reason why someone would buy a GM car over, say, a Ford or Toyota.   This isn't Apple Computers.   GM will still be doing what it has always done in the past - selling cars based on price, brand loyalty, and the staggeringly huge number of dealers across the country, including small-town dealerships.

I just don't see a huge profit picture here.  It may do OK, but it is not the best investment opportunity of the Century.

Of course, 2/3 of GM's business these days is overseas - they sell more Buicks in China than in the USA.  But I wonder how long that game will last.  The Chinese, once they learn to build their own cars, will push out "foreign" brands in favor of locally made rides.  Perhaps.

I could be missing the boat here, of course, but I think investing in manufacturing companies in the USA is still a dicey proposition, unless they are run very, very well.  And I am not sure that the bailout did enough to cut all the fat from the 14th floor of Generous Mothers.

During the bad old days of GM, divisions competed against each other, not against the overseas competition.  As a result, fights would erupt between divisions, as the Buick people would argue that the Chevy version of the same A-body could not have the same legroom.  So they would pad out the interiors to make the cheaper cars more cramped, so as to satisfy the egos of division executives.  Meanwhile, the overseas competition, unfettered by such nonsense, just made the best cars they could - and succeeded at it.

Hopefully that sort of nonsense still doesn't go on at GM.  But unlike Ford, they still sell the same cars and trucks in a number of different guises, and the temptation, when you do that, is to "de-content" the lesser brands to prevent internal competition.  This unfortunately makes your products less attractive when compared to the real competition - the other automakers.

Why should I pay $10,000 more for a Buick version of a Chevy?  Or conversely, why should I buy the Chevy version, which has been gutted of content, when the corresponding Toyota or Ford product has all its features intact?

That is the problem GM has to face.

UPDATE:  December 21, 2010:

If you had any doubt that the silly-factory at GM is still going full steam, check out this article about GM's attempt to eliminate the slang term "Chevy" from the lexicon, in favor of "Chevrolet".  Apparently they have set up a "swear jar" at GM, and you have to put a quarter in it every time you say "Chevy".

Um, I suspect the smart and creative people are polishing their resumes right now.  You know, Chrysler is hiring - big time.

This sort of silly-talk is what gets GM in trouble.  The fate of the company rests of the products, not on five-foot-high machines or whether the cars are called "Chevy" or "Chevrolet".  A turd with "Chevrolet" on it is still a turd.  Stop making turds.

Branding can't save bad products.  Earlier in the recession, GM decided to slap "GM Mark of Excellence" badges on all products (they had a warehouse of them left over from 1979) which reinforced to buyers that all GM products were basically interchangeable crap that came off the same assembly line.  So some other genius gets paid $5,000,000 a year to make the decision to take the badges off, to promote brand individuality.

Maybe if they had fewer managers making these earth-shattering decisions, and perhaps some better content in the cars, they would sell.  GM JUST DOESN'T GET IT.