GM IPO: Pedal To The Metal Or Slam On The Brakes?

| November 17, 2010 | 0 Comments

One of the most anticipated initial public offerings (IPO) in recent history is hitting the markets tomorrow.

Yes, General Motors (G.M.) is about to go public… again.

After sitting in government hands for over a year, GM is about to be reborn.  The famed American icon is about to get a second chance at life.

It wasn’t long ago the company was in a death spiral…

The financial meltdown of 2008 pushed the entire auto industry to the brink of disaster.  Credit markets froze as the economy went into freefall.  Buying cars was the last thing on consumers’ minds.

The sudden drop in sales had G.M. reeling…

Years of poor management decisions and gaping holes in their balance sheet already had G.M. on the ropes.  The financial crisis simply knocked them out.  G.M. filed for bankruptcy in June of 2009.

Concerns about the auto titan’s failure were capturing headlines.  Many thought it would send the entire U.S. economy into an even deeper hole.

So the U.S. government came to the rescue…

Government couldn’t let the 101-year-old company fail.  Too many American jobs were at stake.  Unemployment was already surging and if G.M. got wiped out, it meant over 200,000 people looking for work.

So Uncle Sam (cough… the taxpayer) forked over nearly $50 billion to keep the company going.  The enormous bailout kept workers at their jobs and cars rolling off the assembly line.

But the move had some investors screaming foul…

Many called for the government to let G.M. fail.  They insisted capitalism should be allowed to work.  In this case, buyers would come in to pick up G.M.’s assets in a fire sale.  The government didn’t let that happen.  They stepped in with a huge bailout.

Whether the government did the right thing or not remains to be seen.

Nonetheless, G.M.’s about to be born again…

The government is slowly putting the reins back into private hands.  With the IPO on Thursday, the U.S. taxpayer is going to start getting repaid for their emergency investment.

Some were expecting a lackluster welcome back for G.M…

After all, investors were severely burned by G.M. the last time around.  Shareholders were wiped out and many creditors took a huge haircut on their bond holdings.

With all this bad publicity, you can understand why investors would be gun shy.

But in fact, the opposite is true…

Investor demand for G.M. shares is through the roof!

The company is issuing around $10 billion in common stock, yet there are orders for over $60 billion.  That’s right, investors want over 6 times as many shares actually being issued.

Shares were initially set to be offered at the $26-$29 range.  But now the price is being raised to between $32-$33 per share.  When shares hit the market Thursday, there could be a spectacular buying spree.

Why is there so much demand for an auto company coming out of bankruptcy?

As sad as the government bailout was, G.M. is actually set to be profitable…. very profitable.

The company got a serious makeover in government hands.  Cost cutting measures are making GM leaner and meaner.

The company already reported a nearly $2 billion profit in their most recent quarter.  And with their position in overseas markets, where most of the growth is, profits for GM should be substantial.

Should you be buying shares of G.M.?

If you can get your hands on them, the new G.M. shares appear to be a good buying opportunity.  Many analysts expect the shares of the new G.M. to rise to the mid $40 range in the next few months.

The problem is, many brokers aren’t getting an allocation of the new shares.  This leaves many investors sitting on the sidelines itching to get in on the action.

Is there another way to be a part of the G.M. IPO?

Take a look at G.M.’s competitors.  If G.M. has 36% upside potential in coming months, names like Ford (F) and Toyota (TM) should see buying as well.  After all, both of these companies have taken market share from G.M. in recent years.

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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