I purchased some General Motors Corporation (GM/NYSE) stock this week. In fact, GM closed Thursday at $26.75, which is the price I paid. In the interest of full disclosure, I should add that a while back I puchased some GM stock at $37 (before the Controlled Greed blog was launched). I think that GM was undervalued at $37, and even more so now.
Of course, this could be a case of me "catching a falling knife." But I don't think so.
CG believes that GM is worth more than twice its current stock price. For the quarter ended 3/31/05, the book value was $45.07 and the price/sales ratio was 0.08. And the dividend yield is over 5%.
When will the market fully value GM? Who knows? But keep in mind that my holding period tends to run 3-5 years.
GM stock was roughly $50 a year ago. The reason it has declined since then -- and dropped 26% in the first quarter of 2005 -- is because of lower sales and increased healthcare costs in North America. But CG takes the view that the company's value lies not in North America, but in GMAC and its international operations. Even with that, CEO Rick Wagoner (who purchased another 50,000 GM shares for his personal account a few weeks ago) and his management team are aggressively focusing on the challenges facing the company in North America.
I do NOT think GM will end up filing for bankruptcy protection.
To be sure, GM is a mediocre company in a cyclical and capital intensive business. Yet at current prices (and those even higher, I would argue) it looks extremely undervalued.