General Motors might be fine for the garage, but do you want it in your investment portfolio?
You'll soon have a chance to buy stock in the "new" General Motors Co., which has filed for an initial public offering that's expected to happen Thursday. The company plans to offer at least 365 million common shares at a price of $26 to $29 a share, though the final price would be set the day before the offering.
Taxpayers already own a piece of GM, thanks to a $50 billion government bailout that left the U.S. government controlling about 61 percent of the company. But adding GM shares to your personal portfolio is another matter.
Individual stocks are always dicier than mutual funds, which spread the risk by holding shares in many companies. And GM's prospectus spells out many hurdles the company faces, including a decline in global sales, negative perception of GM products, underfunded pensions and the government's potential to influence management and the company's strategy.
Also be aware that many small investors won't get in on the IPO because those shares have been set aside for large financial firms and their best customers. For instance, discount brokerages Ameritrade, Charles Schwab and E*TRADE won't be receiving any allotment for their customers, CNBC reported last week.
That might make some investors unhappy. But it's a good sign for the stock's prospects, says Chuck Carlson, president of Horizon Investment Services in Indiana. Usually, if IPO shares are being hawked to the little guy, that means no one on Wall Street wants to touch it.
So small investors will be able to buy shares once the stock starts trading on the open market, although likely at a higher price than the IPO.
Ultimately, the decision of whether you should buy the automaker's stock may depend on whether you want to drive a GM vehicle.
Dave Whiston, an equity auto analyst with Morningstar, says GM stock has plenty of upside potential. He adds that if not for the conflict of interest with his job, he would own the stock. GM has streamlined its operations, achieved wage and benefit concessions and the quality and design of its cars are the best in decades, Whiston says.
And the outlook for the auto industry is brighter, too, he says. Consumers last year for the first time since World War II scrapped more vehicles than they bought, and it appears that trend is continuing this year. "There is a lot of pent-up demand," he says.
Whiston estimates the fair value of the stock is $44 per share, which could be reached within the next three years. One caveat: The government's continued role in GM could dampen enthusiasm for the stock.
Horizon's Carlson acknowledges that GM has made some advances, but "at the end of the day, they make cars. That is still a competitive business, a very cyclical business." Plus, a lot of car buyers may be upset with the bailout and shun GM in favor of its competitor, Ford Motor Co., Carlson says.
"If I was going to buy a U.S. car, it would be a Ford," says Carlson, who drives a Mercedes.
GM last week posted a third-quarter profit of nearly $2 billion, its third consecutive profitable quarter. But GM is not out of the woods yet, adds Daniel McHugh, president of Lombard Securities in Baltimore.
"They are still heavily indebted," he says. "Going forward, I would like to see the company making money for two years before I could get interested in buying the stock."
Investors must decide if this new GM will avoid the bad decisions that got it into trouble, such as making unattractive vehicles and costly labor concessions, says James Angel, an associate finance professor at Georgetown University.
"Is it a new GM that won't repeat the sins of the past, or will it be like Lindsay Lohan fresh out of rehab going back to her old ways?" he says.
Angel recommends investors do some homework before buying the stock.
"Go to a GM dealer and kick the tires on the cars and ask yourself if these are the kind of cars I want to buy or anyone else for that matter." If they're not, GM could wind up again in bankruptcy, he says.
GM's IPO by the numbers
•GM proposes to sell 365 million common shares under the ticker symbol GM, with another 54.7 million shares available for sale if demand is strong.
•The U.S. government's stake in GM will fall to at least 43 percent after the offering.
•GM posted a third-quarter profit of $1.96 billion on $34.1 billion in revenue.