Overvalued markets like now are a great time to pick up value stocks…
Especially value stocks that have the potential to grow earnings and multiples…
Value stocks like GM…which may become the next Tesla
That last line is probably a shocker to some as Tesla is clearly focused on the explosive growth of electric vehicles (EV). This is why shares are exploding higher. Whereas GM is a dinosaur...right?
But you didn’t really think that General Motors (GM) was just going to sit there and do nothing. In fact, they have made a MASSIVE investment in EV that other investors are starting to notice which is why shares are on the move.
My goal today is to spell out the more traditional growth and value story taking place with GM shares. Then we will put a cherry on top giving details on how even just a little bit of Tesla magic could go a long way on GM’s upside potential.
Global growth has been decelerating since 2018. This has resulted in auto sales lower than what would be expected given population growth and the normal replacement cycle for vehicles
This should turn around in 2021 due to the vaccine and accelerating economic growth unleashing pent-up demand. It will likely result in car sales above-trend as this statistic is mean-reverting over long periods. This will be a tailwind for all car companies including GM.
It’s impressive that in 2020, GM’s revenue only declined by 4% compared to 2019. And next year, analysts are forecasting 27% revenue growth. Over the next five years, they are expecting 8% annual average revenue growth.
Further, demand should be strong in the US. Rates are going to remain at zero until at least 2022 which means financing will be cheaper and more available. Consumers’ intent to make large purchases is at multi year highs due to people putting off purchases during the pandemic. Due to stimulus payments and higher savings rates, household balance sheets are in strong shape… and, more stimulus may be on the way.
Another source of growth for GM will certainly be electric cars and autonomous driving. Electric vehicles are going to be the next trillion-dollar plus industry and so will autonomous driving.
The company plans to launch 30 new EV vehicles over the next 5 years. It also has the ability to self-fund its growth through its business rather than issuing debt or shares like the startups in the space.
Earnings growth is likely considering that auto sales are expected to be strong in 2021 and 2022. Over the last three months, analysts have hiked GM’s earnings forecast by 54% in 2021 and 25% in 2022.
Like many high-tech industries, there will be a handful of winners. At today’s price, the market is underestimating GM’s chances of emerging as a winner.
In my market commentary I have discussed the ongoing, valuation bubble.
In these frothy markets, it’s even more important to focus on value to give us protection on the downside. GM certainly fits that criteria as it has a forward price-to-earnings ratio of 9.4, and a price-to-sales ratio of 0.7.
In recent years, the company has invested heavily in improving its lineup, cutting costs, and streamlining operations. Another reflection of its operational improvements is that it managed to remain profitable during Q2 and Q3 of last year when many companies posted losses and were focused on survival.
The company has also topped earnings estimates for four, straight quarters. Analysts have also been getting more optimistic about GM. It’s been upgraded twice over the past month and earnings estimates for 2021 are 54% higher than in October.
More and more we see price targets at $70. But truly I tell you that it could reach $100 quite easily given the earnings in hand and still be VASTLY less expensive than Tesla on PE or even PEG basis.
Bubbles lead to funny thinking. GM, which sells 2.8 million cars per year gets valued at $78 billion, while Tesla (TSLA), which will sell 500,000 cars this year, is valued at $800 billion. Further, many EV startups are valued in the billions despite not even having a working prototype.
GM is putting the company’s resources and expertise behind EVs and autonomous vehicles. It recently announced a $20 billion increase on spending for these divisions. It plans to release 30 new EVs globally, and the company is determined to become a leading player. It also has struck a partnership with Microsoft (MSFT) to commercialize, optimize, and support its self-driving software.
So far, the market seems oblivious to GM’s EV division and autonomous driving unit. But, these parts of the company have a better chance than many of the newcomers and startups in winning market share in the growing EV market.
After all, GM already has the production capacity and distribution channels which are the most difficult and capital-intensive parts of the business to build. Even without this upside option to participate in two of the fastest-growing markets, GM’s stock is attractive from a growth and value perspective.
However, the high probability of multiple-expansion in addition to earnings growth is what makes it a tantalizing opportunity.
Multiple-expansion is the key to big gains in the short-term. For example, from the market bottom in March 202, NIO’s (NIO) price-to-sales (P/S) ratio has gone from 2.7 to 38, while Tesla’s has increased from 3.7 to 30.1.
GM’s P/S ratio is a pittance at 0.7. This multiple is likely to expand if the EV bubble keeps expanding as investors and analysts start understanding the possibility of GM winning significant market share in EVs and autonomous vehicles.
GM’s stock is at the rare intersection of value and growth. It’s growing faster than the average stock in the market while being significantly cheaper. Typically, there’s a tradeoff between these two factors.
However, it gets more interesting if you consider that GM offers exposure to the EV and AV markets. Its legacy, auto business ensures that it will have capital to invest in these fast-growing divisions, while other companies will have to raise money by issuing shares or debt.
This combination of upside and low-multiple is what makes the stock unique. It means that if the bubble pops, and money rushes into value stocks, then GM will outperform.
But, it also means that If the bubble gets bigger, then money will eventually find its way into a stock like GM as it gains more traction in EVs and AVs.
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GM shares were trading at $53.39 per share on Monday afternoon, down $2.01 (-3.63%). Year-to-date, GM has gained 28.22%, versus a 2.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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