Michael Fowlkes' Analyst Insights
Options and ETF Analyst Writer
June 27, 2016 - June Auto Sales Likely to Impact General Motors Stock
Detroit automaker General Motors (GM) has lost 16.0% of its value so far this year, but the stock has been fairly stable over the last couple of months, with shares trading in a pretty tight sideways trend. The stock continues to look for direction, and the June auto sales report due on July 1 could provide the catalyst GM needs to break out to the upside. Analysts forecast an annual sales rate of 17.3 million vehicles, down slightly from May’s 17.4 million reading.
GM was recently trading at $28.58, down $8.30 from its 12-month high and $3.96 above its 12-month low. Technical indicators for GM are neutral and the stock is in a tight sideways trend. The stock has recent support above $28.50 and recent resistance below $30.05. Of the 14 analysts who cover the stock, six rate it a “strong buyâ€, one rates it a “buy”, and seven rate it a “hold”. The stock receives S&P Capital IQâ€™s 5 STARS “Strong Buy” ranking.
Europe has been a weak spot for Europe in recent years, and Britain’s recent decision to exit the European Union could spell more trouble for the company moving forward. The auto industry in the U.S. remains OK, but fears over slowing global economies have kept pressure on GM, and will likely do so for the foreseeable future. The vote in Britain resulted in a quick 3.8% drop in GM shares, but that drop lowered an already low valuation to a P/E of just 4.3, which signals that additional downside risk is very limited. On July 1, June’s auto sales figures will be released, and an upbeat report could result in GM shares regain a big chunk of its recent losses. June sales are forecast to be slightly lower on a sequential basis, which has already been priced into auto stocks, so as long as the numbers are in-line with the forecast, I expect all the auto makers to trend higher. I remain cautiously upbeat on the stock, but any long position should have a clear exit strategy in place just in case Wall Street drives shares lower out of fear over the impact of Brexit.
Stock Only Trade
If you're looking to establish a long stock position in GM, consider buying the stock under $28.50. Sell if it falls below $25.50 or take profits if it gets to $32.75.
If you want a bullish hedged trade on the stock, consider an August 21/26 bull-put credit spread for a 40-cent credit. That's a potential 8.7% return (56.7% annualized*) and the stock would have to fall 7.6% to cause a problem.
If you are looking for a bearish hedged option trade on GM, consider an August 31/34 bear-call credit spread for a 35-cent credit. That's a potential 13.2% return (86.0% annualized*) and the stock would have to climb 9.7% to cause a problem.
Covered Call Trade
To purchase the stock with a lower cost basis, consider an August $29.00 covered call. Buy GM shares (typically 100 shares, scale as appropriate), while selling the August $29.00 call for a debit of $27.60 per share. The trade has a target assigned return of 5.1%, and a target annualized return of 33.7% (for comparison purposes only).
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