3 Detroit Heavyweights Investors Should Consider
Since becoming the largest U.S. city ever to file for Chapter 9 bankruptcy, Detroit has announced a plan to rid its balance sheets of more than $18 billion in debt.
The plan involves spending $1.5 billion over 10 years to demolish blighted properties, fix street lighting, and improve public safety and transport services, among other improvements. If the plan succeeds, emergency manager Kevyn Orr said, "Detroit [will] become once again a city in which people want to invest, live and work."
While the plan has been met with some hostility from bondholders, many -- including the city's last resident car-manufacturer, General Motors -- believe that bankruptcy marks "a clean start" for the city.
Real-estate investors seem inclined to agree and are snapping up property at heavily discounted prices; in fact, Detroit is now the fourth-most popular destination for Chinese real-estate investors, who are buying houses by the hundreds without even having seen them.
Meanwhile, stock market investors are eyeing up Detroit businesses such as General Motors, DTE Energy , and Comerica , which have held their own even as the city has fallen on hard times.
Here's a snapshot of three of Detroit's homegrown stocks and why they represent an exciting investment opportunity as the city recovers.
General Motors investors have seen their shares rise 25% over the past year. The share price dipped in February of this year when the company recalled 3.3 million vehicles with faulty ignition switches known to cause airbag failure.
But GM impressed at the Detroit Auto Show 2014, showing how far the company has come in the last five years and suggesting a bright future. According to Javier Valiente of RealTimeInvestment.com:
The company has made the biggest push of any to create a "smart" vehicle, capable of connecting with phone apps and other home devices. 2015 Chevys will come with an app store, as GM tries to foster a technology ecosystem around its cars. In the meantime the flagship Chevrolet ("Chevy") brand won American Auto Writers' prize for both best car and best truck of 2014.
Auto analysts believe that by breaking away from its traditional designs and positioning itself as a forward-thinking company, GM will continue to climb. In the words of Reuters managing editor Paul Ingrassia, General Motors "has a new lease of life; it's highly profitable."
The ignition switch scandal has dinged GM's stock, but I believe the damage is temporary. For comparison, we can turn to Toyota , which recalled more than 9 million vehicles between 2009 and 2011 due to problems with acceleration pedals. But far from suffering long-term effects, the stock has gained a respectable 50% since the recall was announced in September 2009. In 2013 alone, Toyota recalled more than 6 million vehicles for three separate defects. Despite this, TM's share price has grown 11.5% over the past year.
So, regarding GM, while the short-term damage is not insignificant, manufacturer recalls don't typically have a lasting effect on a company's share price. In fact, JPMorgan Chase analyst Ryan Brinkman suggests that shares could have as much as 50% upside when the dust settles.
DTE Energy's share price has risen 7% over the past year and is currently close to its all-time high. DTE sells electricity and natural gas through two utility subsidiaries. There are also a number of unregulated business segments under the DTE umbrella that diversify the company's income stream, including one of America's biggest coal-transportation companies.
Utility companies typically face very little competition, as the industry is regulated by the government, and the cost of building infrastructure for utilities is prohibitively high. Indiana Michigan Power, a branch of American Electric Power, is perhaps DTE's closest rival. However, it only serves areas of Southwest Michigan.
DTE is unique in that it serves the whole of Michigan, meaning that it is poised to profit from the population growth in recovering Detroit as new workers and residents move into the region. In the meantime, DTE's diversified business segments will continue to provide revenue from beyond the state borders, protecting it from fluctuations in the local economy.
Founded in Detroit, Comerica is among America's 25 largest banking companies. Although Comerica moved its headquarters to Texas and is shifting its focus westward, Michigan remains one of Comerica's main geographical markets, having accounted for 29% of net income in 2013.
Because Comerica bases its interest rates on floating measures such as Libor, the bank and its shareholders are poised to benefit from rising interest rates. And, like DTE, Comerica is likely to benefit from population growth in Michigan, where a large portion of its banking centers are located.
The bottom line
The strong performance of Detroit's homegrown companies will be instrumental in the city's recovery, which in turn will attract residents and workers and drive the share prices to new heights.
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