Every so often, smart managers make dumb mistakes. Good ones learn from them while bad ones are often replaced. In 2010, JP Morgan Chase CEO Jamie Dimon told a group of students that “setbacks will happen and when they do, it’s okay to get depressed [and] to blame others —for a while. Eventually you have to get up, dust yourself off, learn from it, and move on.”
Since February, General Motors has recalled 2.6 million of its cars. Its stock has paid the price, falling over 15 percent since the start of the year.
Headlines such as “More Than 2 Million Cars Recalled Due To Gas Pedals Issue” can understandably frighten investors. Many react by selling their shares. However, this headline belonged to Toyota in January 2010 rather than General Motors in February 2014. Historical precedent suggests that opportunities of this makeup present the best reward for patient and savvy investors.
Subsequent to its pedal recall, Toyota’s stock plummeted from $90 to as low as $71.55 a month later, representing a painful loss of over 20% to its investors. Patient investors who held their shares at $90 are up 26% today on price appreciation alone, while savvy distressed investors that bought after the sell-off have earned a capital gain of 60% from their $71.55 cost basis.
Notwithstanding the GM recall, the company was a good investment even north of the $40 per share it traded for in January. The company recently initiated a dividend, which now yields 3.5%, and trades at 8.6x its 2014 earnings forecast. By comparison, Ford Motors offers a 3.2% yield but trades at a higher 10.5x price-to-earnings multiple.
Savvy and patient investors alike can use a little bit of historical precedent and a decent amount of common sense to justify buying General Motors for their portfolio at this price.
Baskin Financial Services Inc. has participated in the auto recovery through owning shares of General Motors and Magna International for its clients.