The following is an excerpt from Best Stocks for 2017: General Motors Company (GM) Is Just Warming Up
As we near the end of the third quarter, General Motors Company (GM) — my pick in InvestorPlace’s Best Stocks for 2017 contest — is putting up a respectable fight.
As I write this, the shares are up 12% year to date, 13% with dividends, which puts me in fifth place. That’s nothing to get excited about, but it does put me at even with the S&P 500.
I don’t like matching the market. I prefer to kick the market’s tail. And I expect that GM will do exactly that as we close out 2017.
To start, valuations are ridiculously low. GM and its peers are being priced as if the entire industry is at risk of imminently going out of business. GM is priced at 6.8 times expected 2017 earnings and 0.33 times annual sales.
Yes, auto sales are notoriously cyclical, and automakers often appear to be cheap when actually expensive (and vice versa) due to the wild variability in earnings. So, let’s smooth out some of that variability by doing a modification of the Shiller P/E, or the cyclically-adjusted price/earnings ratio (“CAPE”).
Doing a true Shiller P/E requires 10 years of data, and GM was reorganized only in 2010. Though Benjamin Graham, who invented the CAPE methodology decades before Robert Shiller looked at it, recommended using between five and 10 years’ worth of earnings data, so we’re fine here.
Using earnings data from 2010 to 2016, General Motors would have a modified CAPE of just over 10. The same figure for the S&P 500 is over 25.
Again, I would agree that GM deserves to trade at a discount to the broader market. But doesn’t a 60% discount seem a bit extreme?
To read the remainder of the article, see Best Stocks for 2017: General Motors Company (GM) Is Just Warming Up