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Why General Motors (GM) Stock is a Compelling Investment Case

If you are looking for the best ideas for your portfolio you may want to consider some of Greenlight Capital’s top stock picks. Greenlight Capital, an investment management firm, is bullish on General Motors Co (NYSE:GM) stock. In its Q4 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on General Motors Co (NYSE:GM) stock. General Motors Co (NYSE:GM) is the world’s largest vehicle manufacturing company. The stock is down 28.2% since the Greenlight Capital’s pitch in January 2020, which suggests the investment firm was wrong in its decision. On a year-to-date basis, General Motors Co (NYSE:GM) stock has fallen by 32.1%.

On January 21, 2020, Greenlight Capital had released its Q4 2019 Investor Letter. Greenlight Capital said that General Motors Co (NYSE:GM) stock is poised to grow in 2020. This isn’t the first time Greenlight Capital talked about General Motors Co (NYSE:GM) favorably either. The investment firm has been a long time General Motors Co (NYSE:GM) bull. In 2018, we shared Greenlight Capital’s bullish General Motors Co (NYSE:GM) thesis in this article.

In 2019, the Greenlight Capital Fund recorded a return of 13.8% as compared to 31.5% of the S&P 500 Index.

Let’s take a look at comments made by Greenlight Capital about General Motors Co (NYSE:GM) in the letter.

“We have owned GM for a number of years and our investment has underperformed the market (our return to date has been 10.6%, annualized). Every year the shares seemed cheap on an earnings basis, but cash flow ultimately came up short for one reason or another. An unprofitable region or two was sold or restructured, investments were made in new technologies, plants and product lines required capital investment, GM Financial required capital to grow, and pension plans were funded. All of these steps have led to a stronger company that can better face future economic and business challenges. However, the net result of so many cash needs is that while earnings have been good, cash flow has lagged.

Management recognizes this disconnect, and in early 2019, the company emphasized that cash flow must better match earnings. As we looked at the company’s forecast, we saw no more regions requiring expensive restructuring, and the above-normal capital and strategic investments appeared to be paid for. As such, we believed that by late 2019 the cash flow would again be significant enough to allow GM to recommence its share repurchase program. We half-asked and half-joked, what would cause cash to come up short in 2019? We couldn’t think of anything. And then a six-week-long strike hit that caused GM to miss its earnings forecast and come up woefully short on free cash flow – again.

And yet, we believe 2020 is the year where it all finally comes together for GM. The fullsize pickup truck and SUV platforms have been fully updated. Channel inventory is low and dealers need to rebuild supply that was reduced during the strike. The restructuring is complete. China sales appear likely to stabilize and ultimately recover. GM Financial is performing well and is over-capitalized and poised to start distributing 100% of earnings. While consensus estimates are for $6.36 per share in earnings in 2020, we believe earnings could surpass $7.00 in 2020 and finally – yes, finally – cash flow should also approach that level. As such, GM should begin repurchasing shares at a healthy clip, providing a tailwind for future EPS growth.

Not included in any of this is GM Cruise, which is still targeting a commercial launch of autonomous vehicles. We doubt the market has any optimism about GM Cruise, despite a $19 billion valuation in a May 2019 investment round. The recognition of GM Cruise as a source of material value is an additional way for investors to re-rate GM shares.”

In Q1 2020, the number of bullish hedge fund positions on General Motors Co (NYSE:GM) stock decreased by about 29% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with GM’s growth potential. Our calculations showed that General Motors Co (NYSE:GM) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.