Should investors follow Buffett into GM?

The billionare's investing style may not work for regular folks.

By Jonathan Berr May 16, 2012 6:19PM
General Motors (GM) shares were up Wednesday after it was disclosed that Warren Buffett's Berskshire Hathaway (BRK.B) had acquired a position in the automaker.

GM closed up more than 2% to $21.91.

The purchase of 10 million shares underscores one of Buffett's famous investment rules: Be fearful when others are greedy, and greedy when others are fearful. Buffett was drawn to GM because its stock is dirt cheap, trading at a price-to-earnings mutiple of 6.22, well under the industry average of 13.49, according to Reuters.

Wall Street analysts are also optimistic about the company. Their average price target is $34, more than 50% above where the stock recently traded.

"While buying 10 million shares of GM isn't a huge bet (yet), the market signal for the U.S. auto industry is as unprecedented as it is fascinating," according to a Morgan Stanley note cited by Bloomberg News.

Shares of the company, though, are down more than 29% over the past 52 weeks as its market share hit a 90-year low. One reason for the decline is the disappointing sales of the much-hyped Chevy Volt along with worries about the fragility of the economic recovery. GM is not an easy stock to like because many of the wounds that the company experienced over the past few years have not entirely healed.

The company emerged from Chap. 11 bankruptcy in 2009 after it received a $52 billion government bailout, most of which was converted to company stock. In 2010,GM repaid $8.1 billion in government loans five years ahead of schedule though it continues to struggle. Losses in Europe dragged down GM's first quarter results though sales in the U.S. remained strong.

The rest of the year won't be easy. Sales in the current quarter are expected to fall by 2% to $38.61 billion. Revenue for the year may rise 3.2% to $155.02 billion.

Remember, the Oracle of Omaha invests over the long term -- almost forever -- and has made his share of mistakes over the years. Investors shouldn't buy stocks just because Buffett, or any one else, likes them. Buffett has made many mistakes over the years, which to his credit he regularly owns up to in his shareholder letters.

Buffett, one of the world's most richest people, can afford not to worry about quarterly swings in market share or whether GM is adding more incentives to lure buyers into dealers showrooms. Most shareholders don't have that luxury. Also, this may not be the best time for most investors to buy GM, since the U.S. government is reportedly planning to unload most of its shares in the automaker this summer.  As shares flood the market, their price may fall.

People who buy GM shares shouldn't expect a smooth ride even if Buffett is helping steer the company.

--Jonathan Berr does not own shares of the listed companies.  Follow him on Twitter@jdberr.



 

 

Tags: BRK.Agm
2Comments
May 16, 2012 9:49PM
avatar
I don'y buy co. stock that has cheated people by going bankrupt.
May 16, 2012 11:33PM
avatar
If I already have enough money why would I want to gamble I don't even want to gamble if I am on the side and aide of the casino
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123
123 rated 1
262
262 rated 2
480
480 rated 3
651
651 rated 4
649
649 rated 5
629
629 rated 6
616
616 rated 7
496
496 rated 8
346
346 rated 9
111
111 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION9
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.