Late last week I traded General Motors ( GM ) ' stock one penny off the lowest price in its history. But I wasn't buying hoping for a rebound. I was selling it short, looking for a collapse, and I'm holding that position today.
It might seem somewhat counterintuitive. Not only was the stock at an all-time low, but the company recently announced a $4.7 billion profit , its biggest in a decade. Some 45,000 union workers will receive profit-sharing payments averaging $4,300 – a record.
And on that very same day, shares of the company slid below their IPO price of $33 for the first time, a vitally important fact overlooked by most of the enthusiastic media reports. The New York Times didn't mention it in their story until paragraph 15. But because we trade the stock, not the story, its weakness and corresponding low remain the only relevant plot points in my book.
"New" GM Trades like the Old One
General Motors (GM) – 3 months
If there was ever a stock that makes people emotional , it's General Motors. Either the company is the backbone of the American working man or the poster child for bad business practices. In many ways it's like discussing abortion or gun control. Minds are made up, and opinions will not be swayed.
That emotion, of course, is only exacerbated by the fact that GM received a $50 billion bailout from the Federal Government, an intervention that left taxpayers the largest shareholders, still owning 26.5% of an extremely weak stock. For the government to break even, shares will have to hit an estimated $53 – up 64% from current prices.
For me, it's nothing personal. Beyond heated television sparing matches , my goal as an investor is simple: absolute return . My feelings on the bailouts are ancillary to my short position , which is driven solely by the price action itself.
In notching those new record lows (on the day of a major profit announcement no less), the stock market, the concertized knowledge of the entire world, is giving us a clear indication that the right price for GM is probably lower than many had previously thought. Shares are down over 10% since the start of the year.
And not all of GM's headlines have been as rosy as its recent profit announcement. The company sold just 281 Chevy Volt hybrids in February ( PDF ). Can you imagine Apple ( AAPL ) introducing a new iPhone , then selling only 500 units? To my knowledge, nobody's lining up to purchase a $41,000 Volt the way they are for an iPad 2 .
For my own purposes, shorting GM functions as somewhat of a hedge. My position in Honda ( HMC ) is up over 30% since we called it " the nation's best car company ." I don't want to exit that trade, so shorting GM provides some downside protection against a correction in the auto sector.
But I also believe betting against GM is likely to generate a healthy profit on its own merits. Despite its recent rebirth, this is a quintessential " old soldier " stock, heavy with the overhang of public ownership and beset with wasteful political influence .
To those who grimace at the notion of selling short a "lifetime low", I'd remind you that in the market "the low" is frequently only "a low." Vonage ( VG ) , for example, had its much-hyped IPO in 2006 at well over $17 a share. It kept sliding to lifetime lows, over and over, until the stock hit 30 cents in 2009.
And the low I sold in GM last week? While the big moves in the market take time , it's worth noting that GM had already dropped 50 cents below that floor by late Monday afternoon.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC . At the time of writing, Hoenig's fund had positions in many of the securities mentioned.
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