Market Watch : Is GM a Good Ride Now?
If what’s good for General Motors truly is good for the country, as that famous saying goes, maybe the stock market will bottom a lot faster than the bears now believe.
Last week, while the market overall lost 5% of its value, GM stock was basically flat. GM actually rose 25 cents Wednesday, when the Dow Jones average tumbled 43.81 points. And Thursday, when the Dow plunged 76.73, GM lost just 37.5 cents.
Friday, the stock rallied $1.125 to close at $37.375, off just 12.5 cents for the week.
Of course, this is still a stock hovering near its 52-week low of $35.50. And it’s down 26% from its 52-week high of $50.50, so there’s plenty of damage there. But why has the market suddenly decided that GM doesn’t deserve any more bashing?
Analysts downplay the idea that the market took heart from GM’s mid-August car sales report last week, which showed car and truck sales off just 6.1% from a year ago, while Ford and Chrysler sales were off much more sharply. Yet, if sales are beginning to strengthen--even in the face of nervousness over the Iraq-Kuwait crisis and worries about high oil prices--couldn’t that suggest that the economy may yet escape recession?
Again, you won’t find many buyers for that argument among GM stock analysts. “There’s nothing behind it,” said Paine Webber Group analyst Ann Knight, referring to the stock’s sudden resilience. The only nice thing you can say is that “the auto stocks had already been clobbered. Let them (sellers) pick on someone else for a while,” she said.
“The yield is attractive; that’s all it is,” said Ronald Glantz, analyst at Dean Witter Reynolds. At the current price, GM’s $3-a-share annual dividend yields 8% annualized. That’s a half percentage point more than you can earn in the average money market fund.
Philip Fricke, analyst at Prudential-Bache Securities, downgraded GM from a buy to a hold Aug. 7 because of the Mideast crisis. The price then was $41.50. Yet Fricke sees GM earning $6.95 a share in 1991, versus $4.95 a share this year, and says “we still see a long-term turnaround” at GM.
A far bigger bull on the auto stocks is David Dreman, a money manager who runs Dreman Value Management in New York. At current prices, Dreman argues, “the market has terribly overreacted on Ford and probably on GM. If we’re not at the bottom of the auto sales cycle, we’re close,” he says.
If you wait to buy the stocks until the auto sales news turns positive, “it’ll be too late,” Dreman says. And even if you’re early in the stocks, you have the dividends to keep you warm, he adds.
Most analysts believe that GM is financially strong enough to avoid having to cut its dividend, even if auto sales stay weak. Ford’s dividend isn’t quite as secure in Wall Street’s eyes. And Chrysler’s isn’t considered secure at all.
But Paine Webber’s Knight warns that if you fear a recession at all, don’t touch these stocks. “About 100% of the time in a recession, the Big Three cut their dividends whether they need to or not,” she says. “The odds of a dividend cut are exactly the odds of a recession.” She remains neutral on the stocks.
LEADING INDICATOR?
General Motors’ stock barely moved last week, while its peers--and the market--plunged.
Fri. Week’s Div. Stock close change yld. GM 37 3/8 -0.3% 8.0% Ford 34 3/8 -5.2% 8.7% Chrysler 12 -5.9% 10.0% S&P; 500 311.51 -5.0% 3.9%
Bargain Hunting, Over Time: The market’s surge Friday took many traders by surprise. Wall Street was braced for the rally to evaporate in the last hour, but it held, and the Dow finished up 49.50, or 2%, to 2,532.92.
Given the continuing crisis in the Mideast, how much credence can you place on Friday’s bounce? First, no market goes straight down, or straight up, forever. So there was bound to be a rally at some point to interrupt the 17% Dow plunge brought on by the Mideast turmoil.
But although some growth stocks were definite targets of bargain hunters Friday, there wasn’t a wholesale rush to pick up downtrodden stocks. Food stocks, for example, weren’t in great demand, even though that recession-resistant group might appear to be a natural site for bargain hunting. Hershey Foods was up just 50 cents to $34.25 Friday, Borden picked up just 50 cents to $31.50 and Ralston Purina lost 87.5 cents to $88.625. Likewise, some drug stocks were surprisingly weak in the rally.
Long term, you may want to be optimistic about the market, and rightfully so. But you may also rightfully be reluctant to buy now, for fear that the bears are correct about a much deeper plunge ahead. What to do?
Some analysts are insisting that, no matter what lies ahead, the prudent investor should begin easing into the stocks he or she wants to own for the long haul. At A. G. Edwards & Sons, the St. Louis-based national brokerage that caters mostly to small investors, “we’re telling brokers to tell clients, don’t jump in and buy everything now,” said Tom Schlesinger, stock strategist. But by picking up a little at a time, he said, an investor protects against the disaster of buying at or near a peak.
Spreading your purchases over a period of, say, five months might seem far less exciting than making a bet all at once. But if a bear market has arrived, you’ll be far better off buying all the way down than buying a big position now. And you won’t face the anxiety of trying to time the market’s turn, when it eventually stops falling and begins a new bull market.
Briefly: While stocks slump, commodity futures investing is paying off: The average commodity fund jumped 5.7% in July, the best month so far this year, reports Norwood Securities in Chicago. The average fund was up 12.1% for the year, through July 31.
