General Motors' New Stock Starts to Look Like the Old One

Investors have had their minds on oil lately and not the machines that run on it. It may have escaped their notice that General Motors' stock (GM) has suffered an alarming tailspin.

After being offered for sale at $33 a share last November after GM emerged from bankruptcy reorganization, the stock climbed as high as $39.48 in January and has headed downhill ever since. It reached a new low of $32.01 on Friday, below the issue price.

The reason for the slide is unclear, although shriveling earnings is an obvious first place to look. Post-bankruptcy GM only has four quarters of financial results to look at, but the most recent one was by far the worst. Revenues have increased steadily throughout the four quarters, but costs have risen faster. The result in the fourth quarter of 2010 was operating profits of $324 million, compared with $1.85 billion for the third quarter.

That's not what shareholders had in mind when they bought the initial public offering and hopes for a spectacular resurrection of the once venerated company were running high. Compare the mood toward GM then with what Toyota (TM) was facing in early 2010. The Japanese company, the world's leading carmaker, was coping with problems with the accelerators on many of its vehicles and the resulting severe tarnishing of its reputation. Its stock was tarnished too, having plummeted into the low $70s from well over $100.

I said at the time that the stock was factoring in more bad news than was likely to come Toyota's way and that it was a low-risk bet for value investors. The stock languished for several months but has since recovered strongly. It closed Friday at $90.99.

At this point neither company looks like a great investment. Toyota is trading at about 27 times analysts' consensus estimate of earnings for the financial year ending next March, well above the valuation of the broad stock market at a time when the prospect of rising global inflation and interest rates threatens to derail an economic recovery that was none too robust to begin with.

GM trades at a much less demanding valuation, just 6.4 times estimated earnings. But it faces the same forbidding macroeconomic backdrop as Toyota. Moreover, with its latest quarterly report nothing to get excited about and with no clear evidence that the new GM can compete in the global marketplace any better than the old GM that fell into the abyss could, it might be prudent to give its stock a miss, along with Toyota's.

The deterioration of GM's stock has implications for the broad market too. That old saying, "As General Motors goes, so goes the nation," has been remarkably apt for nearly a century. The recent performance of GM does not bode well for the nation.

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