As year-end approaches, investors look to unload stock for losses and this can create opportunities in oversold, undervalued names. One of these names is General Motors (NYSE:GM), a global automotive company that develops, produces and markets cars, trucks and parts worldwide.
The company also provides financing services through General Motors Financial Co. (GM Financial), formerly AmeriCredit Corp. (AmeriCredit), which it acquired in October 2010. GM Financial purchases automobile finance contracts for new and used vehicles purchased by consumers primarily from franchised and select independent dealerships. In May 2010, GM completed the sale of Saab Automobile AB.
GM has been under siege lately, with the share price nearly being cut in half this year. Earnings estimates for GM are about 4.49 for 2011 and 4.60 for 2012. So with the stock trading at $21.35, this puts the forward multiple at only 4.65.
While GM earnings would be impacted by an economic slowdown, we feel the multiple contraction is extreme, especially given that input costs would likely also fall in an economic downturn.
Shares have held support at the $20 level twice, putting in a nice double-bottom, with the 9-day Relative Strength Index showing some long-overdue strength after reaching extremely oversold levels. Given the cheap valuation and strong technical backdrop, I look for GM to move back to the $24 level by March expiration.
Based on GM’s current market price of $21.68 and using a target price of $24, a target date of March 16, 2012, and $1,000 of investment capital, this is an excellent candidate for capturing some nice upside by buying a March call (like the GM March 18 Call) or a call spread, selling a March put spread or buying the stock.
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