Value Line on General Motors

Everett writes:

You write a lot in your stock book about Value Line and how much you respect their opinion. Yet, you say you like General Motors below $10. Value Line hates it. What gives?

Liking General Motors below $10 doesn’t mean I’m buying yet. What I’ve written to subscribers and mentioned in interviews is that The Kelly Letter is watching to buy the stock below $10. Our line in the sand is actually $8.

Watching is the key. I often watch stocks for weeks, months, and even years in some cases before buying. We’re also watching for the right time to buy Russia, but that doesn’t mean we’re buying yet. Is it cheaper than before the Georgia invasion? Sure, but it may get cheaper still and, in fact, has been doing just that.

Similarly, is GM cheaper than before its latest management blunder? Sure, but that hardly instills confidence. The company was building SUVs while Toyota switched to hybrids, as oil prices were gearing up for a major push higher. The company says nobody could have known, but other companies seemed to have had a pretty good finger in the changing winds.

My interest in GM is speculative. At some point, even GM will be cheap enough to cover for putrid management. We’re getting to the zone where any idiot will be able to do better than the current gang in charge, and that’s when you want to start buying for a recovery — assuming the place has the financial wherewithal to survive. Sometimes they don’t.

As for what Value Line thinks, it’s not much different than what I think. Here’s the Aug. 29 commentary from Value Line analyst Jason Smith:

The lure of General Motors’ shares is mainly as a very speculative long-term recovery play at this juncture. Investors already on board here have watched the stock’s price plummet to a level not seen in five decades. Historic earnings losses, a sizable cash drain, and a worsening operating climate are only a few of the forces scaring away investors. And with GM’s stay in the red probably extending into 2009, the stock will likely plod along at a depressed valuation in the near term. Indeed, the issue currently holds our Lowest rank (5) for relative year-ahead price performance. In addition, the Safety rank is Below Average (4) and the company’s Financial Strength rating has fallen two notches, to C+, since our May review. We do believe GM is capable of a turnaround and, thus, foresee better days ahead for these shares. Still, those eager to take advantage of the stock’s substantial regression must be willing to face what will likely be a very tumultuous ride.

The company needs to stop burning through its cash. The quarterly depletion is in the $2 billion-$3 billion range. GM has suspended the dividend, which is a necessary move. A 20% workforce reduction and the sale of $4 billion in assets, including the Hummer brand, are also part of the cost-saving blueprint. In all, GM aims to trim its cost structure by $10 billion through 2009.

Further inventory reductions are also likely. Sizable production cuts are already under way and a return to “employee pricing” should help. These discounts provided a sales spark back in 2005 and may do the same this year, though, for now, the timing of the promotion is very limited.

A showroom makeover is a critical piece of a turnaround here. U.S. sales continue to decline, falling 26% in July, to just over 233,300 units, primarily due to sinking demand for SUVs and trucks. GM is stepping up its efforts to get into the fuel-efficient small-car game, including the anticipated 2010 launch of the plug-in hybrid Chevy Volt.

I don’t see much difference between my stance and Value Line’s.

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