November 18, 2010 / 3:48 PM / 7 years ago

Is it a good day to buy GM?

5 Min Read

<p>A message welcoming General Motors is seen on the Morgan Stanley stock ticker at their world headquarters in New York November 17, 2010.Shannon Stapleton</p>

WASHINGTON (Reuters) - Individual investors who want to buy into the new General Motors Corp may find they are too late to be early.

As is often the case with initial public offerings, the easy money is made before most people get access to the shares. By the time the renewed company ends its first day of public trading today, it can be expected to have already experienced as much as 90 percent of initial price growth, according to studies of IPOs.

"You'd better have a strong stomach and like roller coasters," said Michelle Krebs, senior analyst at Edmunds.com. "There's been a lot of exuberance and we'll see a lot of volatility over the next few days."

GM went public again when it sold 478 million shares of common stock at $33 a share, and $4.35 billion in preferred shares, on Wednesday in the largest IPO in U.S. history.

The question individual investors face today is whether they want to add any of those shares to their retirement funds or family portfolios. Analysts are divided on the company's prospects, and many investors still haven't forgiven GM for dissing shareholders and bondholders when it went bankrupt with a government bailout in December 2008.

The Ipo Issue

IPOs in general tend to not perform all that well for individual investors. A study published in the Journal of Business & Economics Research last year said 80 percent of the initial price gain of an IPO typically occurs in the first day of trading, and another 20 percent happens within three days. That comes at the cost of "uninformed investors" who overpay for the stock, said authors Michael Adams, Barry Thornton and Russ Baker of Jacksonville University.

But Jay Ritter, a finance professor and IPO expert at the University of Florida, says that research mainly applies to small companies, and as the biggest IPO ever, GM will have a different experience. "Investors should treat GM just like any other stock" that is likely to neither overperform nor underperform the market because it is an IPO, he said.

Ritter said GM is a likely future addition to broad market indexes like the S&P 500. When that happens, it could get a bump up in price because of increased demand. But even that bump probably won't be very big, because there's already a large public float in the stock, and early investors are already expecting that.

The Outlook

The real decision investors face is whether they think GM is well positioned and well managed and will deliver long-term profits. Casey Thormahlen, an analyst with research firm IBISWorld, is underwhelmed. "They are losing market share in the U.S. and in Europe, and there's some question about whether their restructuring has been enough," he said. Investors who want to buy car companies would be better off with Volkswagon or Hyundai, he says.

Kirk Ludtke, an analyst with CRT Capital Group, thinks GM has plenty of room to grow; he pegs the fair value at $45 a share.

Krebs sees good and bad: She thinks the company will benefit from the bankruptcy housecleaning that saw it dump its old debt and win concessions from its unions. And it has a big international footprint, with solid sales in China, Brazil, India and Russia. But "the company has had four CEOs in less than two years. There are some new managers, but it's largely the same people who were there before. I'd put that on the risk side," she said.

The Preferred Shares May Be Safer

Thormahlen feels better about the GM preferred shares than the common shares. Buyers who pay $50 for the preferred shares will get 4.75 percent a year paid out in dividends, and their shares will convert automatically to GM shares in 2013.

"That's a safer buy and I don't think it's a bad idea at all," he said.

But not everyone is so sanguine. Jim Heitman, a Los Angeles financial planner and money manager, tends to like preferred shares as a conservative part of his clients' portfolios, but suggested it's too soon to trust GM. "They didn't treat the prior preferred holders very well, and they might have to make the drive of shame to Washington again," he said. "But if someone is holding a gun to your head and saying you have to buy the common or the preferred, then buy the preferred."

Buy the Bonds Instead?

There are still about $27 billion in "old GM" bonds in circulation, and under the terms of the company's bankruptcy, the holders of those bonds will walk away with something, if not the full value of their bonds.

When the GM bankruptcy settles (probably in the spring of 2011), the bondholders will get pro-rated shares of new GM, warrants which entitle them to buy GM shares at $10 and $18 a share, and partial ownership in a trust that will eventually get additional shares. Put all that together and today the market thinks it's worth about 37 cents on the dollar.

But Ludtke says the bonds might be a better buy than the stock. "The bonds are outstanding; we think they have a 30 percent upside," he said.

That's not bad for IOUs from an old, bankrupt company.

(Editing by John Wallace)

Linda Stern can be reached at linda.sternatthomsonreuters.com

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