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General Motors: A Buy or SellPosted by securities on: 2006-09-21 10:59:45
Dennis Biray With the recent decrease in oil prices, you may be eager to get back into the transportation game with the potential of making a decent return in certain equities. One of these specific equities could be General Motors (GM). While may experts are hyping the motion that oil is on its way down for an extended period of time, my views tend to differ which may not make GM as enticing as it is now. Cringing on the future market of oil commodities, GM shows an incredible inverse relationship in terms its points juxtaposed to the price of oil. For example from 2004 to the beginning of 2006, an accurate representation of when oil prices escalated at its highest peak, shares of GM fell from near 55 points to close to 20 points in April of 2006. While the stock has made a small come back to near 35 dollars as of September of 2006, such an increase is unfortunately due to the decrease in oil as the dependency on oil is more extreme than almost any other factor. Since GM is highly touted for its truck and SUV lines, the big gasoline consumers, sales are directly affected by gas prices to such an extreme that if prices of oil climb enough, sales may become inverted as consumers may exchange their GM trucks or vans for more efficient automobiles produced by different companies. Such a transition will hurt GM’s fundamentals and future guidance placing immense pressure for big institutions to sell their shares. Now, you may be reading such a sentiment and be thinking that oil prices have fallen nearly 13% over the last few weeks which make this a perfect buying opportunity for GM. While the logic seems reasonable, in the rational expectations of the stock market, the reverse thinking will always bring in more positives than negatives. With such a sentiment of bliss surrounding shareholders of GM, shares will rise for the duration of the period of low oil prices. With this in mind, shares may increase a few percentage points for the next few weeks causing some capital gains. If you do tend to hold on to your shares for this period, I would advise selling around the 35 to 40 point range, if GM is ever to reach a number again. One innocuous looking cell in the Atlantic Ocean positioned to assail the Gulf of Mexico can have the effect of causing oil prices to go back to the 80 dollar range. It’s still hurricane season, there are still ongoing conflicts in the Middle East, and the oil market is a very volatile one. Investors may ask why prices are going down so much during September. The reason is because of a hiatus of intense conflict in the Middle East and a reluctant hurricane pattern, but any small disturbance, even just a rumor may have a tremendous negative effect on oil and shares of GM. Fundamentals are another reason why GM should not be in your portfolio. Supporting negative margins in terms of revenue and a huge drop in net income to the point of negative numbers in the last few years shows the correlation of how oil has affected the numbers for this company. Operating margins are terrible as is the decrease in total assets relative to the increase in total liabilities. The company is supporting a negative EPS of nearly 20 cents, and while dividend payout may look favorable at 1.00, there is no justification in other areas to compliment this one bright spot. Thus, as oil has probably reached its floor in terms of price at around 60 dollars, expect prices of oil to increase in the following weeks as temperatures get colder into the first week of fall. With that will come GM’s eventual decline back into the mid to low 20s with no optimism that investors can look at. If you do own GM shares, I would advise selling at such a price, and if you want to still have transports in your portfolio, companies like Honda and Toyota are excellent alternatives that produce automobiles suited for higher oil prices. Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com, or to view other articles written by him visit http://www.biraynetworks.co.nr |
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