Alcoa vs GM: with 1 month to go

In November 2010, the GM IPO came out with massive fanfare. It was touted as an example of the success of the Obama Administration policies, and justification for the auto bailouts (which injected Government control over the auto industry). At the time we stated

“But let’s compare that investment to something else. The “investment” America made into GM, via the $49.5 billion bailout. An investment that was made with our tax dollars with a promise of not only repayment but also profit.”

Critical in the claim of profit was the target price of $53/share. It is at this magical number that GM was at breakeven to the bailout given to it. From that point, any improvement signalled profit to the American people. It would be the only point at which the auto bailout would be justified and worthwhile.

Based on the lofty and, in our opinion incorrect, expectation of reorganization and removal of the causes of GM requiring a bailout the IPO was highly anticipated. Unions alone would own 100 million shares, China some 5% of the outstanding stock, and of course the 26% held by the Government. The Volt (an electric car costing $41,000 built on the shell of a car that costs $16,000) was rolling out of the factories – part of the impetus from the then-majority shareholder, the US Government – without buyers or a market. And of course all the major issues with the embedded cost of union perks remained.

We looked at the situation, and using the same skills that were of value during the years spent as a stock market broker, we decided to show the real value of GM. We made an investment challenge.

Against the Government expectations and hype for GM we posed ALcoa Aluminum (AA). It was a position we have held for some time, since the stock was $5.55 back in 2009. We have highlighted the investment that we made (yes, as in we owned AA), not as a promotion but as a real world example of proper investing technique, here and in the Central New York Business Journal on May 14, 2010 (along with ANEN in that article).

Alcoa was trading at $12.94 that day the challenge was made. The target was $18/share. The goal was to see which investment made more sense. Was it better to invest in a compmany (AA) that had substantial upside value based on solid investing analysis or was it better to buy into the hype and rhetoric of the Government and politicians that were looking to secure a victory to enable their political hopes.

The challenge was simple. In 6 months which investment would be better? In addition, there was the interesting question of how close, and likely, would it be for the American people to see a recoupment (and profit) from GM.

While we are less than 30 days away, the writing appears etched upon the walls. Both stocks have risen and fallen since November 2010. Both have had positive and negative news hit the markets. Both are subject to international events and forces, altering outlooks beyond the predictability of virtually every analyst and model.

So far:

Alcoa (AA) has traded higher than the initial $12.94, EVERY day since Nov. 17th. It reached a peak, and our target sell price, of $18.13 on April 6, 2011 (the birthday of M V Consulting Inc president Michael Vass by coincidence). As this is being written it currently is at a profititable price of $16.41/share.

We have cleared our hurdle of expectation. The net profit to our target was 40% in less than 6 months. The current profit is 26.8%.

For GM, the IPO opened at $34.19. But we will maintian our comparison based on the IPO of $33/share. It reached it’s highest point on Jan. 7, 2011 of $38.98 or 18%. Currently it is $29.97 or a LOSS of 9.2%.

At the start of the challenge we said

“When the Government interferes, as in the case of GM, there is a mess. The company is not better off. The investors are potentially at significant risk. The product is impared and unwanted. No one wins, except foreign governments and selected special interest groups (like unions).

Is GM a good investment? Will the IPO make money for individual investors, or for the American taxpayer? Will GM be worth more or less in 2 quarters, in a year? All good questions. I would say the prospect, based on Government interference is no. I would say that I won’t sell my profit in Alcoa to buy GM. I would say that in 5 years I think that GM will be in as bad a shape as it was 2 years ago.”

The stock market, given time, always filters out hype and all factors (political or otherwise) other than the real ability of a company to perform. The stock market ALWAYS values the real assets and liabilities of a corporation, with time leading that stock price to its true valuation.

Much like the empty hype of politicians insisting that the Stimulus is a success, counter to every objective analysis and the very targets proposed by the politicians themselves, GM has had the luster of its hype fade away. We now see what is the net effect of a company, directed to create products the consumers do not want, at prices that are niether profitiable nor consumer-friendly. This is the result of Government interfering with private business.

There are of course 28 more days to the 6 month investment challenge. GM could potentially skyrocket in that time. Alcoa could plummet. Such outcomes would be a boon for the Obama Afdministration and those that believe Government intervention is the salvation for the national deficit and everyday life in America. The reality is more akin to more of the same.

Alcoa may go lower, GM will go lower. The chance to see a profit, or even break-even, on the $49 billion auto bailout to GM has faded faster than the hype of the IPO. At this point, we remain confident that it is more likely that GM will require yet another bailout before it ever approaches the realm of profitablility per share. This is especially true considering the massive influence of Goverment, politics, and unions as stockholders in the corporation.

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About the Author

Michael Vass
Born in 1968, a political commentator for over a decade. Has traveled the U.S. and lived in Moscow and Tsblisi, A former stockbroker and 2014 Congressional candidate. Passionate about politics with emphasis on 1st and 2nd Amendments.

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