General Motors Company (GM): Are Hedge Funds Right Fleeing This Stock?

General Motors Company (NYSE:GM) has a wide moat. People who drive GM vehicles tend to purchase GM vehicles again. Manufacturing vehicles people want to buy is also notoriously capital intensive. It costs billions of dollars to do the research and development necessary to meet the government’s safety and efficiency regulations. It costs billions more to build manufacturing plants and to market the vehicles. Because of the cutthroat-nature of the industry, there hasn’t been a successful new car company in the United States in more than five decades (aside from the lone exception of Elon Musk’s Tesla).

General Motors Company (NYSE:GM)’s brand loyalty, capital scale, and 27% payout ratio make GM a good dividend stock. GM’s started paying a $0.30 quarterly dividend in March 2014 and raised its payout to $0.36 in June 2015. In February 2016, GM raised its dividend again to $0.38 per share, giving the stock a 4.9% dividend yield. With analysts expecting GM’s EPS to grow by an average annual rate of 14% over the next five years, GM’s dividend could rise by 10% a year for the next half decade too.

Although GM trades for just 5.25 times forward earnings estimates, some investors are negative on the stock. Some bears believe car manufacturers will be disrupted in the near future by ride sharing apps. Because ride sharing increases vehicle utilization rates, the sharing trend lowers demand for new vehicles overall. Other pessimistic investors fear the rise of Tesla. Tesla Motors recently moved up its schedule for producing 500,000 cars by 2018 from 2020. The accelerated timeline means that Tesla will grab a bigger piece of the pie earlier. Other more macro investors note that the vehicle manufacturing industry is inherently cyclical and economically sensitive. If U.S. economy softens, GM sales will decline and its forward P/E will look less attractive.

Despite the bearish points, there are plenty of reasons to believe GM will be a good long term holding. First, GM is tackling the vehicle disruption problem head-on. GM made a $500 million investment in ride sharing app Lyft in January, and the company recently committed to testing self-driving Chevrolet Bolt EVs with Lyft within a year. If the project is successful, GM’s stake in Lyft will rise and the company will garner more market-share in the crucial EV/driverless car market. GM’s financial results have also been good. The company beat both bottom and top-line expectations for its first quarter, earning $1.26 per share on sales of $37.3 billion. EBIT-adjusted margin increased by 130 basis points to 7.1%

General Motors Company (NYSE:GM) was in 67 hedge funds’ portfolios at the end of March. GM has experienced a decrease in hedge fund interest of late. There were 84 hedge funds in our database with GM positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), Kimberly Clark Corp (NYSE:KMB), and Metlife Inc (NYSE:MET) to gather more data points.

On the next page, we are going to take a more detailed look at the hedge funds’ moves surrounding GM in the last couple of months.

According to most stock holders, hedge funds are perceived as slow, old financial tools of years past. While there are more than 8000 funds trading today, We look at the masters of this club, around 700 funds. Most estimates calculate that this group of people handles the lion’s share of the hedge fund industry’s total asset base, and by paying attention to their matchless picks, Insider Monkey has determined several investment strategies that have historically outstripped the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy beat the S&P 500 index by 12 percentage points per year for a decade in their back tests.

Heading into the second quarter of 2016, a total of 67 of the hedge funds tracked by Insider Monkey were bullish on this stock, a decline of 20% from the fourth quarter of 2015. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Warren Buffett’s Berkshire Hathaway has the largest position in General Motors Company (NYSE:GM), worth close to $1.57 billion, corresponding to 1.2% of its total 13F portfolio. Sitting at the No. 2 spot is Greenlight Capital, led by David Einhorn, holding a $480.8 million position; 8.2% of its 13F portfolio is allocated to the company. Some other members of the smart money with similar optimism encompass Cliff Asness’ AQR Capital Management, Robert Polak’s Anchor Bolt Capital and D. E. Shaw’s D E Shaw.

Seeing as General Motors Company (NYSE:GM) has faced falling interest from the smart money, we can see that there exists a select few fund managers that slashed their full holdings in the fourth quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest stake of all the hedgies watched by Insider Monkey, totaling close to $156.2 million in stock. Frank Brosens’s fund, Taconic Capital, also dumped its stock, about $140.2 million worth. These transactions are interesting, as total hedge fund interest dropped by 17 funds in the fourth quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as General Motors Company (NYSE:GM) but similarly valued. We will take a look at Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), Kimberly Clark Corp (NYSE:KMB), Metlife Inc (NYSE:MET), and Prudential Public Limited Company (ADR) (NYSE:PUK). This group of stocks’ market values match GM’s market value.

As you can see these stocks had an average of 41 hedge funds with bullish positions and the average amount invested in these stocks was $2.55 billion. That figure was $3.72 billion in GM’s case. Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is the most popular stock in this table. On the other hand Prudential Public Limited Company (ADR) (NYSE:PUK) is the least popular one with only 12 bullish hedge fund positions. General Motors Company (NYSE:GM) is not the most popular stock in this group, but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard TEVA might be a better candidate to consider a long position.

Disclosure: none