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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

General Motors

April 3rd 2014 General Motors
NYSE Symbol: GM
Industry: Auto
Price as of 4/3: $34.88

2014 is looking a lot different than 2013 so far. The major averages continue to spin their wheels with many of the major averages unchanged. Dissecting the equity space, the Nasdaq and Russell 2000 remain higher as many investors avoid the emerging markets and other foreign exchanges for a second straight year. The Nasdaq was up even more before the March swoon as investors hit the best performing tech and biotech stocks bringing valuations down to more attractive levels. Bonds across all sectors are in the green for the year, but longer term many bonds pose great risk when interest rates rise once again. The sectors that benefit from rising interest rates like banks and insurance stocks continue to perform well. Many of the big cap banks like Wells Fargo, JP Morgan, US Bancorp, and Bank of America made new highs last week. Citigroup still looks attractive. Besides the financials, the seasonally related sectors like retail and autos look attractive. This week we'll highlight an auto company that has come under some selling pressure due to an ignition switch defect linked to deadly crashes. The stock of the week is General Motors. Goodbye Government Motors. Since coming public once again, GM has turned around their business and their image, but a recent ignition switch defect has caused the stock to pull back 20% pushing the dividend yield up over 3%. The headline risk may keep the stock under pressure for a while, but a great dividend, cheap valuation and improving fundamentals makes GM a compelling long term buy at current levels.

GM finished up 2013 well, but with the start of the New Year the stock has come under selling pressure. Earnings at the start of February did little to improve investor sentiment. For the fourth quarter, GM rode record North American earnings to a profit of $913 million, or 57 cents per share verse $892 million, or 54 cents per share a year ago. Revenue rose 3 percent to $40.5 billion. General Motors' fourth-quarter net profit rose 2 percent from a year ago, but the company fell short of Wall Street expectations as it spent heavily to restructure outside the U.S. New CEO Mary Barra said GM's restructuring actions will strengthen the company for the future. Much of the restructuring costs were for employee severance expenses. Citi Investment Research Analyst, Itay Michaeli told investors in a note that he doesn't see GM's results as a story-changing quarter. "Weakness is isolated to regions where GM is aggressively restructuring throughout 2014," wrote Michaeli, who has a $48 one-year price target on the stock. But Stifel analyst James Albertine wrote in a note that GM's European restructuring may take longer and be more expensive and risky than management is saying. The European division, similar to Ford, continues to struggle as GM expects to break even before taxes in Europe by the middle of this decade. Even including Europe, GM has $4.05 in earnings power, with $12-$13 billion in cash flow and will have free cash flow of $4.5-$5.5 billion. Thanks to the improving cash flow, GM is returning the cash to investors in the form of a dividend. The balance sheet has been bolstered with $27.9 billion in automotive cash against $7 billion in automotive debt. In fact, its net cash position accounts for nearly half of its market capitalization.

Four years ago, we highlighted GM on our website. Fast forward to today and the stock still trades at the same price, but earnings and the fundamentals continue to improve. Currently, GM trades for 9 times earnings and 7 times 2015 earnings. The stock also trades for 1.3 times book value. On the charts, the stock looks to have support in the $34 price range. A 3.4% dividend yield should also provide support at current levels allowing investors to collect their dividends waiting for the headlines to impove and the fundamentals to reaccelerate.