Will General Motors See a Turnaround After Recent News?

With shares of General Motors (NYSE:GM) trading around $38, 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.

General Motors has dropped 6.6 percent in January after gaining 14 percent during the last three months of 2013. Ford (NYSE:F), on the other hand, has gained 6.1 percent this month, after dropping 8.5 percent during the last three months of last year. General Motors’ slump can be attributed to its sales announcement on January 3 when it missed forecasts by a mile. Now, however, Morgan Stanley’s (NYSE:MS) Adam Jonas and team think the stock looks “more interesting.”

They explain that, “We cut our estimates materially on the back of 2014 guidance provided at Detroit. Our adj. EBIT drops from $11.4bn previously (6.8 percent margin) to $10.0bn (6.1 percent margin), on lowered expectations in GMIO, GMNA, and GME. While 25 percent upside comes with high risk, we think GM is more interesting now. We think the new guide is appropriate given increasing competition and slowing growth in N America, operational and FX challenges in non-China EM and a new mgmt team setting the bar after 5 years of TARP compensation limitations. Following the guidance reset, we believe the company has slightly positive earnings revision risk. We also believe investor expectations for a share buyback are far lower following Detroit — finally. The challenge of owning GM is that the company is still in the early innings of executing its structural turnaround while the US auto cycle is approaching the later innings.”

T = Technicals on the Stock Chart Are Mixed

General Motors stock has been trending higher over the last couple of months. However, the stock is currently pulling back and may need time to consolidate 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 between its rising key averages which signal neutral 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

32.53%

76%

73%

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

Put IV Skew

Call IV Skew

February Options

Average

Average

March Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral 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’s 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-49.44%

-16.67%

-3.33%

6.49%

Revenue Growth (Y-O-Y)

3.72%

3.88%

-2.32%

3.47%

Earnings Reaction

3.24%

-1.10%

3.01%

0.03%

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

-8.96%

3.14%

-3.09%

16.71%

-4.94%

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. Morgan Stanley’s Adam Jonas and team think the stock looks “more interesting” now. The stock has been trending higher over the last couple of months, but is now pulling back. Over the last four quarters, earnings have been decreasing while revenues have been rising, which produced conflicting 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.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More From Wall St. Cheat Sheet: