An Area GM Investors Must Watch


General Motors (NYS: GM) is at something of a crossroads. On the one hand, GM has come a long way since the bad old days: It has minimal debt, over $30 billion in cash, and a rapidly improving product line.

Yet big problems remain. Many of its vehicles still lag competitors. It's burning huge sums in Europe. Its margins are dwarfed by those of its biggest regional rivals - Ford (NYS: F) in the U.S., Volkswagen (NASDAQOTH: VLKAY) in China.

Is GM's stock a buy, or something to avoid? I created a premium report on GM to help investors understand if GM is likely to follow Ford and return to glory - or crash and burn again under the weight of its long-standing problems.

Below is an excerpt from the report, laying out one of the three areas that anyone investing in GM must watch. We hope you enjoy it.

An area that GM investors must watch
GM's recovery is still an unfolding story. While there are likely to be important developments on many fronts in the coming months and years, anyone considering an investment in GM would be well-advised to pay close attention to three areas in particular, including this one: Ongoing fallout from GM's taxpayer-funded bailout.

Ongoing fallout from the bailout
GM was famously "bailed out" by the U.S. and Canadian governments in 2009, with about $50 billion in financing and a controversial, high-speed bankruptcy proceeding. Technically speaking, GM has "paid back" the money owed with a mix of cash and stock. While the Canadian debt has been fully repaid, GM by its own calculation has "returned" just $23.1 billion (of $49.5 billion borrowed) to the U.S. Treasury.

The Treasury still owns 500 million shares of GM common stock, a 32% stake. If the government were to sell its stock at current prices of around $25 a share, it would be nearly $14 billion underwater on its "investment" in GM.

Many analysts expect the government to sell its stake sometime after the U.S. presidential election in November — no matter who wins. Whenever the sale happens, it will raise two concerns for potential GM investors: First, the impact of 500 million new shares of GM hitting the market. Many analysts believe that this is already priced into the stock, and is a key reason why GM is trading at a substantial discount.

Second, public pressure might drive GM management to make up the difference on the government's "investment." GM can afford to do so: The company has well over $30 billion in cash, significantly more than the $20 billion or so it needs to hold as a reserve to ensure its ability to invest in product development through a steep economic downturn. That said, a decision to spend over $10 billion to satisfy public pressure would compete with other priorities, and might not be in the best interest of GM's business in the long term.

The upshot is this: The U.S. government's exit from GM ownership will be a big story, one that could have a big effect on the stock. While GM management could propose a creative solution to smooth the government's exit, the possibility of a situation that leaves the government with a loss - and the public with a bad taste in its mouth - exists.

Looking for more guidance?
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