NEW YORK — Would you buy stock in a company that has hemorrhaged tens of billions of dollars for years and run through three bosses in quick succession just because it has turned a profit for a few months?
That is essentially what General Motors will ask investors to do when it takes itself public again with one of the largest initial stock offerings ever. With the stock market already on edge, it’s a lot to expect.
The good news: Longtime investors say buying during bad times is the best way to make money with auto stocks, provided you have a stomach of steel. And for the brave, GM may offer a perfect opportunity.
“The stocks look expensive when profits are low, but that’s traditionally when you should get in,” says Standard & Poor’s analyst Efraim Levy.
GM filed papers Wednesday with regulators detailing its plans to return to the stock market. Though it didn’t specify a date, experts say the offering could come as early as October.
The company earned $1.3 billion from April through June, its second profitable quarter in a row and a remarkable turnaround since its 2009 bankruptcy. Investors in initial public offerings, or IPOs, like to see several quarters of earnings, especially from manufacturers.
GM also said chief executive Ed Whitacre would depart Sept. 1. He will be replaced by board member Daniel Akerson, who will be the fourth CEO in 18 months. And GM has the misfortune of planning an IPO when demand for new public shares remains low.
Still, U.S. carmakers have proved to be good investments if you get the timing right.
That is the conclusion of McGinn Investment Management, run by self-described “contrarian” investor Bernie McGinn, after studying five-year returns for investors who put money into GM and Ford a year before the start of recessions. The firm looked back over three decades.
“The question now is has the American auto industry turned the corner?” asks McGinn, who has been managing money for 30 years. “Do they have their costs in line? Do they have focus?”
McGinn, who owns Ford shares, thinks U.S. carmakers have improved. But he says he will wait until GM announces the price of its stock before deciding whether to buy.
For years, GM stock was held by millions of Americans individually or in mutual funds. But it’s uncertain it can return to wide ownership soon, given its recent struggles.
To be included in the S&P 500 index, for instance, companies generally need to post profits for four consecutive quarters. GM doesn’t plan to offer a dividend.
After falling into bankruptcy, GM got a $50 billion bailout, of which $43.3 billion still needs to be repaid. The federal government owns 61 percent of the company, as a result of giving GM the money. It hopes to cash out at least part of its stake in the public offering.
The bull case for “Government Motors,” as some now refer to GM, is that it is making solid profits, even though U.S. sales are still near historic lows, running at an annual rate of about 11.5 million cars and trucks this year. Most industry analysts predict sales will rise above 12 million next year and reach about 14 million in 2013. So if GM can hang on to or increase its market share, its profits will rise as well.
GM can make money at lower U.S. sales rates because it shed billions of dollars in debt during last year’s bankruptcy. Also, it shifted billions in retiree health care costs to a United Auto Workers trust fund, and the UAW agreed to contract concessions allowing it to pay new hires about half the wage rate of older workers. It closed 12 factories and is using those remaining at more than 90 percent of capacity versus 38 percent a year ago.
Former U.S. budget director David Stockman, who made and lost millions in the auto industry while on Wall Street, urges caution. He says the U.S. will face a glut of cars for years, and even a leaner GM is likely to get hurt.
