General Motors (GM) is a well-known manufacturer of cars and trucks in the United States. I am bullish on the stock.
On a psychological level, it’s not easy for many people to buy stocks near their 12-month lows. It can feel gut-wrenching, as if you’re deliberately jumping into quicksand.
GM stock currently fits that description. It takes a certain mindset and strong stomach to entertain this stock at its current share price, even though General Motors is an automotive giant that’s been around for decades.
Maybe you haven’t developed those muscles, but if you’re going to test the waters with any company, it might as well be an American icon that has stood the test of time, like General Motors.
Fear in the Air
Don’t get the wrong idea. The last thing you’ll want to do is jump into a troubled trade without delving into the reasons why GM stock is down. Otherwise, you could end up getting trapped with “dead money” on your hands.
The first step is to assess the damage. After topping out at around $64 in November 2021, and then again in January 2022, GM stock embarked on a prolonged, painful slide. Recently, the stock fell to $40 and change.
Okay, so we’re not talking about the COVID-19 pandemic low of $18 here. Yet, GM stock is still near its 52-week low, so there’s definitely fear in the air.
Fear can lead to rare bargains in the financial markets, though. Consider that General Motors’ trailing 12-month price-to-earnings (P/E) ratio is currently 5.9. If that’s not an irresistible bargain, then what would be?
Even if your contrarian instincts are tingling now, let’s not get ahead of ourselves. Informed investors must ask: What prompted the GM share-price drawdown in the first place?
We could cite a number of contributing factors, such as the U.S. Federal Reserve raising the Fed funds rate. This will dis-incentivize auto loans, and that’s certainly problematic for American automakers like General Motors.
Is this factor, by itself, a reason to shun GM stock? Not really, as the financial markets have likely already priced in the rising Fed funds rate. It’s practically a done deal that the Federal Reserve will raise that rate at each and every FOMC meeting this year.
In other words, the rate-hike risk premium has probably already been priced into GM stock, and then some. Therefore, this factor shouldn’t, by itself, dissuade anyone from buying the stock near its 12-month lows.
The Chip Dip
Another contributing factor to the decline in General Motors stock, without a doubt, is the lack of availability of essential technology components. As you’ve probably seen in the headlines, microchips are particularly in short supply nowadays.
This is a problem that seems to get a little bit better sometimes, but then continues to wreak havoc on the U.S. automotive industry.
According to General Motors, microchip supplies improved during the first three months of 2022 compared to 2021, thereby improving production and deliveries in 2022’s first quarter — yet, supply-chain issues persist.
“There is still uncertainty and unpredictability in the semiconductor supply base, and we are actively working with our suppliers to mitigate potential issues moving forward,” General Motors assured.
The company made that statement as General Motors announced a shutdown of its Fort Wayne, Indiana, pickup truck factory in for two weeks in April. The reason? The company ran short of computer chips.
Certainly, it’s scary to hear that an automaker is shutting down a production facility, even if it’s likely a temporary shutdown. It’s enough to deter some traders from buying GM stock, but that’s unfortunate because General Motors should be able to withstand the current chip-shortage crisis.
Not a New Automaker
Even if some investors might be overly worried about General Motor’s future, General Motors president Mark Reuss evidently remains calm and confident. His sanguine attitude is predicated on General Motors’ ability to stand the test of time — and a pair of potent stats, as well.
“We’re not a new automaker. We’ve got lots of volume, lots of partnerships. We’ve got over 20,000 suppliers, $88 billion of material that we run through that chain to make our cars, trucks and crossovers,” Ruess pointed out.
Thus, General Motors should be able to get through this crisis, just as the company has withstood past crises, including the 2008-09 financial crisis and the March 2020 onset of COVID-19.
Ruess added, “We’re not new to this game. We work on it every day, and it’s never over.”
That’s exactly the right attitude that current and prospective GM stock investors should want to hear right now.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, GM is a Strong Buy, based on 13 Buy and three Hold ratings. The average General Motors price target is $71.13, implying 80.1% upside potential.
The Takeaway
You don’t have to let the microchip shortage and the Federal Reserve’s interest-rate hikes shake you out of the trade with GM stock.
If you’re a true contrarian, now is the time to make a firm decision on GM stock. Otherwise, you might miss out on substantial gains when the fear subsides.
Download the TipRanks mobile app now
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
