Why Wall Street Is Betting Against GM

Why Wall Street Is Betting Against GM
Why Wall Street Is Betting Against GM

Short sellers have significantly increased their bet that GM (GM) shares are going to drop: Short interest in the No.1 U.S. car company jumped 26.5% to 41.5 million shares in the two-week period that ended May 15.

Based on the stock's trend, the market would appear to agree with opinion. GM shares have fallen more than 15% this year, while the DJIA is 7% higher.

GM's first quarter earnings were impressive enough. The quarter's net income attributable to common stockholders of $3.2 billion, or $1.77 per fully-diluted share, marked over a year of steady earnings improvement. Revenue increased $4.7 billion to $36.2 billion, compared with the first quarter of 2010. But investors seem to be more concerned with GM's future than impressed by the strength of its last quarter.

Among the obvious challenges GM faces is a slowdown of domestic sales. Research firms such as J.D. Power report that car sales are faltering in the U.S. Part of the problem is that incentives are lower than they have been. Manufacturers may be attempting to take advantage of reduced production by Japanese firms in the wake of the earthquake there. Without strong competition from Toyota (TM) and Honda (HMC), GM may believe it can increase its profit margins by forcing car buyers to pay closer to sticker price. That approach works -- until buyers turn away in the hopes that better deals will appear when Toyota and Honda return to the market in force and use incentives to claw back market share they'll have lost due to low inventories.

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Problem No. 2 for GM, and for the industry in general, is the high price of gas. Consumers have become reluctant to make big-ticket purchases as more and more of their income goes to daily driving costs. Data from Gallup shows that significant numbers of potential customers will start buying fuel-efficient cars if gasoline heads above $5 a gallon. GM's high-gas-mileage cars have been a key part of its sales strength so far this year. But gas drifting back down below $4, and, if Gallup is right, those prices won't be enough to cause a rush to dealer lots.

Another GM challenge is China, where it is generally acknowledged that the U.S. company and VW are the market share leaders. China may be the world's largest car market, but the rapid increase in the growth of sales there has slowed as the Chinese government has dropped tax incentives for auto purchases. Of course, the world's largest car market is bound to draw the world's largest car companies. GM faces more intense competition in China going forward as Japanese, Korean and European automakers increase their efforts there.

The final hurdle for GM is increasingly intense competition in its home market. The imports of Japanese cars may have slowed temporarily, but Hyundai is now the fastest growing car company in the U.S., and its stablemate, Kia, isn't far behind as American buyers turn to its inexpensive, high-gas-mileage cars. Meanwhile, it also faces a resurgent Chrysler. The once-battered auto manufacturer's sales are up 22% through April to more than 404,000 units

GM showed much promise as it exited Chapter 11 not long ago. Now, it's under siege.

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