Trading General Motors Stock - Bought GM on book value

Monday, March 14th, 2005

I bought 100 shares of General Motors today. GM reminds me of a story my uncle told me about buying railroad stocks years ago. Sure, the railroads were losing money to trucking firms, but they owned prime real estate in the downtown area of every major city in the country. When the shares traded for less than the real estate, it was time to buy. I guess the same thing was true for K-Mart. In the case of GM, the problem isn't their profits or dividends, both of which are great. The problem is the GM pensioners and their health care costs. It's such a big worry that GM has a price/book ration less than 1:1. In other words, the book value of GM shares is over $50, but the shares are trading at $34. If the book value of GM is "real", then the shares are selling at a 33% discount to book!

GM trades at a P/E multiple of just over 5 times earnings, earned over $6.5 per share in 2004 and paid a $2.00 dividend, that's over 5%. It's a liquid stock, averaging over 6 million shares a day, GMAC (General Motors Acceptance Corporation) supposedly makes a mint on the credit and insurance businesses. So everybody must be betting that GM's problems with retiree's will sink the company. I don't believe that. When I was in High School, I remember a kid who'd just made some money consulting for DEC (story unto itself) buying Chrysler shares with the money, because in his words, "The government won't let Chrysler go broke." He was right, though eventually the government let the Germans buy them. In the case of GM, the government is stuck with the health and pension obligations if it lets GM go broke, and that would break the bank. I've seen GM's pension obligations quoted as being above $100 billion, though it's supposedly funded, but the health care costs balloon every year, and GM has nearly a half a million covered retirees. I believe the government will legislate GM's continued existence, whatever it takes, including more quotas, tax rebates, you name it. So even though I'm buying GM today for the sake of a trade and could sell it this week at a loss, eventually it's going to be a bargain.

An hour after I bought GM stock, a friend handed me the Friday NYT business section, with the lead article: "How Long Can GM Tread Water?" The journalist, Danny Hakim, points out GM's $1800 per car carrying cost for healthcare and pension benefits, plus the looming Toyota presence, and GM's inability to close inefficient factories due to union contracts. GM CEO Wagoner stated that they aren't expecting a government bailout based on observing the airlines and steel companies. It seems to me that the government is already paying the pension benefits to many ex-employees of steel companies and airlines, and they aren't going to want to add GM to the list.

Starting Portfolio Cash on 2/14/2005 was $25,000
Symbol/Index # Shares or Cash Purchase Price Day High Day Low Today's Change Closing Price Closing Value

AMD 200 $17.13 $16.31 $16.69 +0.08 $16.44 $3,288

SYMC 100 $21.19 $21.26 $21.05 +0.06 $21.17 $2,117

MU 300 $10.64 $10.44 $10.28 -0.03 $10.39 $3,126

GM 100 $34.24 $34.34 $34.11 -0.01 $34.33 $3,433

Portfolio¹ $12,131 N/A $24,095

Dow Jones (DIA) 230.251 $108.45 $108.16 $107.58 +0.30 $107.81 $24,829

S&P 500 (SPY) 206.254 $121.21 $121.16 $120.28 +0.75 $120.38 $24,986

Nasdaq (QQQQ) 658.241 $37.98 $37.36 $37.03 +0.17 $37.17 $24,579

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