Auto giant GM shares are up about 52% in 2021.
Despite robust auto demand, ongoing semiconductor shortages are putting pressure on the financial data of auto companies, including General Motors.
Long-term investors may want to consider buying dips in GM stocks, especially if they fall toward $60.
Investors in automaker General Motors (NYSE:) delivered robust returns in 2021. Year-to-date, the Detroit automaker's shares are up 51.80%, while the Index is 49.6 % has increased.
On November 18, GM shares rose above $65 and hit an all-time high. But since that peak, the stock has fallen about 3% and traded at $63.21. The stock's 52-week price was $40.04-$65.18, and its market capitalization (cap) is $91.77 billion.
In recent quarters, the longtime automaker has entered the electric vehicle (EV) and autonomous vehicle (AV) market – a move that investors like. Highlight Recent Statistics:
"Between 2020 and 2025, GM will invest $35 billion in EV and AV product development spending, exceeding GM's investment in gas and diesel."
General Motors released Q3 stats on October 27. It was $26.78 billion, compared to $35.48 billion a year ago. Diluted adjusted earnings per share (EPS) came in at $1.52 versus $2.83 in the third quarter of 2020.
In its recent quarterly shareholder letter, management said:
"In the third quarter, our adjusted EBIT was $2.9 billion, with a margin of 10.9 percent. The quarter was challenging due to continued pressure on semiconductors. But it also includes very strong results from GM Financial, the recall we have reached with our valued and respected supplier and joint venture partner LG Electronics, and $0.3 billion in equity income from our joint ventures in China.”
Despite the optimistic words, investors initially raised their eyebrows at the overall report. Prior to the release of Q3 numbers, GM stock was about $58. It was below $54 on October 29, after which buyers returned to the market. Then, on Nov. 18. GM shares hit a record high of $65.18. On Friday, December 10, the stock closed out the trading week at $63.21.
What to expect from GM Stock
Among 22 analysts polled via Investing.com, General Motors' stock has an "outperform" rating.
Chart: Investing.com
Analysts also have a median 12-month price target of $73.14 for the stock, representing an increase of more than 15.5% from current levels. The 12 month price range is currently between $31.00 and $99.00.
Similarly, according to a number of valuation models, such as those that consider dividends, P/E multiples, or the 10-year Discounted Cash Flow (DCF) growth exit method, the average fair value for GM stock is $ 89.29 , implying an upside potential of over 41%.
In addition, we can look at the company's financial health by ranking it on more than 100 factors relative to peers in the consumer discretionary sector. In terms of growth and earnings health, General Motors scores 3 out of 5 (top score), thus performing well.
The latest P/E, P/B and P/S ratios for GM stocks are 8.4x, 1.7x and 0.7x, respectively. By comparison, those metrics for peers are 14.4x, 1.9x, and 0.7x.
Given GM's ambitions to break into the EV space, we should also look at the comparable valuation levels for Tesla (NASDAQ:). They are 295.1x, 37.8x and 21.8x. In other words, investors who believe GM's EV efforts will pay off in the coming years may find that General Motors offers better value.
Finally, readers looking at technical charts may be interested to know that several medium-term indicators of GM stocks are warning investors of increased volatility and providing overbought signals.
Our initial expectation is that General Motors stock will trade in a range, possibly between $58 and $62, establishing a new base. After that, another bullish move is likely to begin. Buy GM stocks at current levels
Investors who are not concerned with daily price movements and who believe in the company's long-term potential should consider investing in General Motors stock now.
On December 10, GM's stock closed at $63.21. Buy-and-hold investors should expect to hold this long position for several months, if not several quarters, as the stock attempts to hit analysts' $73.14 price target. Such a move would lead to a return of more than 15% from current levels.
Readers who take this approach, but are concerned about large declines, may also consider placing a stop-loss at about 3-5% below their starting point.
2. Buy an ETF with GM as a holding
Readers who don't want to put all of their capital into General Motors stock, but still want exposure to the stock, may want to consider looking into a fund that the company holds as a holding company.
Examples of such ETFs include:
First Trust NASDAQ Global Auto Index Fund (NASDAQ:): This fund is up 22.5% YTD and the weight of GM- shares is 9.66%;
iShares Self-Driving EV and Tech ETF (NYSE:): Fund is up 27.8% YTD and GM stock weight is 3.33%;
Invesco S&P 500 Enhanced Value ETF (NYSE:): Fund is up 30.4% YTD and GM stock weight is 3.00%;
Consumer Discretionary Select Sector SPDR Fund (NYSE:): The fund is up 27.5% YTD and GM stock weight is 1.95%.
3. Cash-Secure Put Sale
Investors who believe GM stocks could continue to hit new highs in the coming weeks should consider selling a cash-backed put option in General Motors stock—a strategy we employ regularly. Because it concerns options, this setup is not suitable for all investors.
Such bullish trading could be especially attractive to those looking to receive premiums (from put sales) or potentially own GM stock for less than their current market price of $63.21.
A put option contract on GM stock is the option to sell 100 shares. Cash-secured means the investor has enough money in his or her trading account to buy the security if the stock price falls and the option is granted. This cash reserve must remain in the account until the option position is closed, expires, or the option is assigned, meaning ownership has been transferred.
Let's assume that an investor wants to buy General Motors stock, but does not want to pay the full price of $63.21 per share. Instead, the investor would prefer to buy the shares at a discount in the coming months.
One option would be to wait for GM stocks to fall, which may or may not be. The other option is to sell one contract of a cash-backed General Motors put option.
So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option while also setting aside enough money to buy 100 shares of the stock.
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Let's assume the trader executes this trade until the option's expiration of February 18, 2022. Since the stock is $63.21 at the time of writing, an OTM put option would have a strike of $60.00 .
So the seller would have to buy 100 shares of GM at the $60.00 strike if the buyer of the option were to exercise the option to allocate it to the seller.
The GM February 18, 2022 60-strike put option is currently offered at a price (or premium) of $2.85.
An option buyer would have to pay $2.85 X 100, or $285, in premium to the option seller. This premium amount belongs to the option seller, no matter what happens in the future. The put option will stop trading on Friday, February 18.
Assuming a trader entered this cash-backed put option trade now for $63.21, the maximum return for the seller at expiration on February 18 would be $285, excluding trading commissions and fees.
The seller's max profit is this premium amount if GM stock closes above the strike price of $60.00. If that happens, the option will expire worthless.
If the put option is 'in the money' (meaning that the market price of the General Motors stock is less than the strike price of $60.00) before or upon expiration on February 18, this put option can be assigned. The seller would then be required to purchase 100 shares of GM stock at the put option's strike price of $60.00 (i.e., $6,000 in total).
The breakeven point for our example is the strike price ($60.00) minus the option premium received ($2.85), i.e. $57.15. This is the price at which the seller would lose money.
Cash-secured put selling is a fairly more conservative strategy than buying a company's stock at the current market price. This could be a way to take advantage of any slippage in General Motors stock in the coming weeks.
Investors who end up owning GM stock as a result of selling puts may further consider setting up covered calls to increase the potential return on their stock. Thus, selling cash-backed puts could be considered the first step in owning stock.
