I have to admit that there are certain times when the market does not make any sense at all. The curious case of GM continues to baffle me.
Usually when a company faces millions of dollars in losses, a public relations nightmare, and mounting lawsuits investors will choose to avoid buying – or holding – shares in said company. But, for some reason, that does not seem to be the case with GM.
Following yesterday’s announcement of an additional 3.4 million recalls related to the ignition switch, the company’s total number of recalls issued in the US this year stands at 17.73 million and over 20 million worldwide. That is significantly more than their old annual US record of 10.75 million recalls that was set back in 2004.
Even worse, it is only June 17th!! That leaves more than 5 full months for GM to recall even more of their cars.
Moreover, an even more shocking fact related to GM’s recalls this year is the fact that the company has now recalled more cars across the world so far in 2014 than the total number of cars it sold globally in 2012 and 2013 combined!
Let that sink in for a moment…
The company sold 9.3 million cars in 2012 and 9.7 million in 2013 (globally) for a total of 19 million. Yesterday’s recall has now brought GM’s total recalls to over 20 million. Again, simply shocking.
Not only is GM expected to take a $700 million loss in the second quarter stemming from these recalls, but the damage to their reputation is likely worth much more than that. What is even more shocking to me is that despite all of these troubles, GM shares are only down approximately 12% YTD in 2014. Hardly a sufficient drop if you ask me.
This leads me to my main question – who exactly is buying shares of GM???
While it has been documented thoroughly that GM was, and remains, a top pick among hedge funds at the end of 2013 and still in 2014, all of the buying cannot be coming from them.
Consider this. Shares of Ford (F) fell over 8% in December 2013 on news that they would only earn $8 billion in profits this year instead of the $8.5 billion they earned in 2013 because they chose to invest in their future by introducing more new car models worldwide than they usually do. Justified? In my opinion, definitely not.
Today shares of F are roughly where they were before their announcement in December. All this despite several pieces of favorable news that have been announced by F over the past 6 months, especially with regard to their exponential growth in China.
Meanwhile, I feel as though shares of GM have not been punished enough for their impending losses and reputation risk.
So again I ask, who is buying shares of GM? And why is no one buying shares in F? What are the hedge funds and other investors waiting for before they sell their shares of GM???
I know the downside risks that GM are exposed to are certainly not worth the 3.4% dividend yield. Hopefully investors will come to their senses soon, but I wouldn’t hold my breath.