Is General Motors a Healthy Stock for Your Portfolio?

With shares of General Motors (NYSE:GM) trading around $36, is GM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

General Motors designs, manufactures, and markets cars, crossovers, trucks, and automobile parts worldwide. The company markets its vehicles primarily under the Buick, Cadillac, Chevrolet, GMC, Opel, Holden, and Vauxhall brand names, as well as under the Alpheon, Jiefang, Baojun, and Wuling brand names. It sells cars and trucks to dealers for consumer retail sales, as well as to fleet customers in daily rental car companies, commercial fleet customers, leasing companies, and governments.

Senate investigators are widening the scope of the inquiry into General Motors’ decade-long failure to recall cars with a defective ignition switch to also focus on the supplier that made the flawed part. The supplier, Delphi, did not permit its employees to be interviewed by Anton R. Valukas, the former United States attorney who conducted an internal inquiry into G.M.’s handling of the switch problem and this month produced a scathing report on the automaker’s corporate culture. But the Senate Commerce Committee, which has the power to subpoena witnesses, unlike Mr. Valukas’s company-financed investigation, is expected to make Delphi a subject of a hearing soon. The hearing has not yet been scheduled, though. Delphi employees have had informal meetings with congressional staff members, according to a person briefed on the matter. The forum would be the first substantial public inquiry into the company’s role in a safety issue that has led to a half-dozen federal and state investigations, hundreds of lawsuits, and virulent public criticism. In two previous hearings before a House subcommittee, Delphi and its role in the safety crisis largely escaped scrutiny. Scores of documents made public by a House committee on Thursday contain a number of exchanges between G.M. engineers and Delphi employees over an ignition switch that both parties recognized as below standard. The force needed to turn it, or torque, was so low that it could, if jostled or bumped, suddenly switch off the power of a moving car, disabling air bags and impeding power brakes and power steering. G.M. now links the defect to at least 13 deaths and 54 accidents, and has recalled 2.6 million Chevrolet Cobalts, Saturn Ions and other small cars as a result.

The documents indicate that multiple Delphi employees knew that the lead switch engineer, Raymond DeGiorgio, who has been dismissed by G.M., had signed off on an upgrade to the ignition switch in 2006 without recording the change with a new part number. One Delphi document from April 2006 said, “Ray DeGiorgio agrees to implement” a new switch “without changing” the G.M. part number. Delphi did not immediately return a request for comment. Some of the documents were cited in the Valukas report, but the full text had not been public until the House released the correspondence on Thursday. Another document identifies a G.M. employee, Dan Fernandez, as a recipient of an email about a “proposed action” by Delphi that would “increase torque force” in a revised switch. Altogether, the documents show that numerous Delphi employees were aware of the switch change. Beyond Delphi’s role, the documents released on Thursday also underscored how long G.M. employees had grappled with the switch problem. Doug Wachtel, a senior manager for internal investigations at G.M., wrote on March 29, 2012, to colleagues to say that his team would be looking into the complaint history for heavy key chains potentially turning from the “on” position to the “accessory” position, which turns off the engine but allows certain electronics like the radio to operate, and would be obtaining engineering data on the ignition switch.

T = Technicals on the Stock Chart Are Mixed

General Motors stock has struggled to make positive progress in the past several years. The stock is currently trading sideways and may need time to stabilize before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, General Motors is trading above its rising key averages which signal neutral to bullish price action in the near-term.

GM

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of General Motors options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

General Motors options

23.29%

20%

18%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on General Motors stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for General Motors look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-89.66%

5.56%

-49.44%

-16.67%

Revenue Growth (Y-O-Y)

1.44%

3.05%

3.72%

3.88%

Earnings Reaction

-0.63%

-0.02%

3.24%

-1.1%

General Motors has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about General Motors recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has General Motors stock done relative to its peers, Ford Motor (NYSE:F), Toyota Motor (NYSE:TM), Tesla Motors (NASDAQ:TSLA), and sector?

General Motors

Ford Motor

Toyota Motor

Tesla Motors

Sector

Year-to-Date Return

-10.00%

11.70%

-2.66%

58.51%

-1.32%

General Motors has been a poor relative performer, year-to-date.

Conclusion

General Motors continues to change its business as it looks to entice companies and consumers with its new and improved vehicles. Senate investigators are widening the scope of the inquiry into General Motors’ decade-long failure to recall cars with a defective ignition switch to also focus on the supplier that made the flawed part. The stock has struggled to make positive progress in the past several years and is currently trading sideways. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has produced mixed feelings among investors. Relative to its peers and sector, General Motors has been a poor year-to-date performer. WAIT AND SEE what General Motors does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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