(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The bulls in shares of General Motors Co. (GM) may be in for a shock as the stock fails to live up to lofty expectations. The average analyst’s price target on GM is nearly 27% higher than the current stock price of around $39.50. The bullish price objective comes in the face of a weak technical chart and bearish options bets.
The earnings and revenue outlook for the company is not flattering either, with both expected to fall, not rise, in the years ahead. The dismal outlook for the company could be one reason why the stock has underperformed the broader S&P 500 over the past year, rising by nearly 9%, versus the S&P 500 rise of almost 14%.
Despite the poor stock performance, analysts have upped their price target on the stock by nearly 25% over the past year, to roughly $50. Despite the bullish targets only 59% of analyst’s rate shares a buy or outperform, while 36% rate shares a hold.
GM Price Target data by YCharts
Another cautionary sign is the outlook for earnings and revenue estimates, which has remained relatively unchanged for full-year 2018 and 2019, despite the bullish outlook for the stock. Analysts are looking for earnings to drop by nearly 3.5% in 2018, while revenue is expected to climb by 8.5% and forecasting no growth in 2019. Even more interesting is that analysts see earnings falling in 2020 by over 3%, and revenue falling by 2%.
GM EPS Estimates for Current Fiscal Year data by YCharts
The technical chart continues to look weak, and momentum continues to come out of the stock, with the relative strength index declining and volume tapering off. The chart suggests that shares could fall by about 6% from its current price to about $37.25.
Bearish Short-term Bets
Options set to expire on Aug. 17 suggests shares may fall in the coming weeks as well. The number of bets indicating the stock will fall outweigh the wagers shares will rise by about 2 to 1, with 14,000 open puts at the $40 strike price. Additionally, the number of puts at the $39 strike price also outweigh the calls by about 2 to 1. For the buyer of the $39 puts to earn a profit, the stock would need to fall below $38 if holding the options until expiration.
With the revenue and earnings outlook for the business looking weak, the market seems to be sending a message. The stock is likely not going to meet the lofty price targets analysts have laid out.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.
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