Following in Mason's Footsteps: Selling General Motors Common Stock, Buying the Series B Convertible Bonds

On Friday, I switched my General Motors (GM/NYSE) common stock position to the company's Series B Convertible Senior Debentures (GBM/NYSE). This move follows the move Mason Hawkins and Southeastern Asset Management made, and that I linked to in a post on September 11.

The money received from selling the stock was put into the convertible bonds. In that sense, I'm keeping the position in GM. But for the purposes of this blog, we're closing out the GM stock position.

I first mentioned GM stock here in April 2005 at $26.75. The stock was sold Friday at $13.10. Factoring in dividends collected, that's a loss of 36.1% (-10.6% on an annualized basis). This shows how important dividends can be. This position would be down more than 50% not including them. I will also point out that I bought GM stock before launching Controlled Greed in April 2005, so my personal loss is greater.

The GM Series B Convertible Bonds were bought Friday at $10. I believe they're dirt cheap. But I thought GM stock was undervalued, too. Wish me luck.

Comments

[Scott]

Can you elaborate a little on why you think they're dirt cheap?

[Sivaram Velauthapillai]

I like your move if you wanted to stick with GM. If you are bullish on GM, convertible bonds are the way to go. At least you get paid around 12% yield while the situation unfolds...

Is there a reason you went with GBM rather than GXM or GPM? Or do you view them as being nearly-identical (they sort of are)?

[John]

Scott: GBM is cheap primarily based on it yielding nearly 12%. But this one isn't alone, many covertibles are bargain-priced from what I understand. See the Bloomberg article I linked to in my post on Mason Hawkins and GM on 9/11/08.

Sivaram: I did look at the others and couldn't see much difference (if any). I thought about spreading my money across all of them, and consider them a single position. But my remaining GM funds have dwindled and I noticed from SEC filings that Southeastern put their money in GBM (buying 33% of the outstanding shares according to Bloomberg). So I figured, what the heck, just go with Mason all the way.

[Greg]

I have held GBM for several years now. I have watched them trade in the mid $20's down to below $5. Where do these bonds stand if GM files bankruptcy?

[John]

Greg: Shareholders in GBM get paid before the common stock holders in that case.

[Greg]

What happens if the government comes in and does a take over like they they did with AIG. I thought I read that common stock and other investments were worthless once that happened.

[John]

Greg: I haven't followed the details of the AIG situation, other than I heard the common stock is likely to be worthless. I no nothing about any AIG bonds. All I know is that generally the bondholders get paid before common stock holders. It might not be one hundred cents on the dollar, but something. That said, I could easily be wrong. Consult your broker about the details impacting your account.

[Scott]

Do you know what happens to GBM if GM is acquired?

[John]

Not offhand. May depend on the deal itself. I switched to GBM from the common for the reasons stated, primarily the yield (since the common stock dividend was done away with).

[Barry]

If you thought they were dirt cheap at 10, what do you think they are 5 1/2? Mud cheap?

[John]

Barry: On-the-way-to-zero cheap. I mean, it can only go to zero, right? ;-)

[Greg]

Have any of you guys sold your Debentures or do you think they will be safe?

[John]

Greg: I haven't sold (I'd post it if I did). They aren't safe. They are just safer than the common. Anyone who can't afford to lose the entire position should dump them, IMO.

[General Motors]

GM and Chrysler were potentially headed for bankruptcy. They even asked for cash advance loans from the Government back in November, along with a request for open lines of credit from Ford. GM Stock has recently taken a huge tumble on the market, after President Obama asked CEO Rick Wagoner to step down from his post as the head of GM and all subsidiaries, which he promptly complied with. Some experts have advocated that both GM and Chrysler declare bankruptcy and merge, with both discarding all brands that aren't competitive. Regardless, it appears dark days are still ahead for General Motors.