Stock sales by GM insiders drop a hint: Stay away
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Speculators who’ve been betting that General Motors Corp. stock still has some value probably should take a cue from six top executives of the company: The six, including retiring Vice Chairman Bob Lutz, sold a total of more than 200,000 shares in recent days.
From Reuters:
Lutz, who is now an adviser to the automaker, sold $130,989 worth of GM stock at the closing price of $1.61 on Friday. That sale of the 81,360 shares cleared out all of Lutz’s direct holdings of GM stock, according to his filing with the Securities and Exchange Commission. The five other executives, including Lutz’s successor, Thomas Stephens, GM North America President Troy Clarke, Chief Information Officer Ralph Szygenda, manufacturing chief Gary Cowger and head of European operations Carl-Peter Forster also sold all of their GM stock holdings, according to the filings.
Before news of the filings GM shares on Monday fell 17 cents to $1.44, a new closing low in the stock’s collapse over the last year.
A GM spokeswoman said the executives’ sales occurred within a narrow window allowed for insider transactions.
GM is headed either for bankruptcy protection or an out-of-court restructuring that the company says would leave current shareholders with just 1% of the equity in the firm. The federal government, the United Auto Workers and bondholders would get the rest.
In a bankruptcy GM’s common shares almost certainly would be worthless. That’s the way it almost always works out.
But some speculators have been betting that GM might avoid bankruptcy and that even leaving 1% of the equity for current shareholders would give the stock a value of at least a few dollars a share.
Yet most Wall Street analysts who still follow the company continue to advise selling the stock, even at $1.44. GM’s out-of-court restructuring proposal envisions initially issuing about 60 billion new shares to the government, the UAW and bondholders, then doing a 1-for-100 reverse stock split.
So current shareholders would end up with just one share in the new GM for every 100 shares they own. What would that one new share be worth in the market? Clearly not the current $144 face value of 100 existing shares.
Current shareholders have to think in terms of having a claim on just 1% of whatever GM earns in the future. Even if the company could earn $10 billion a year at some point, that equates to $100 million for the current 600 million shares outstanding -- about 17 cents a share.
Efraim Levy, an analyst at Standard & Poor’s, on Monday cut his recommendation on the stock to ‘strong sell’ from ‘sell,’ to emphasize the point: Get out -- fast.
‘The shares seem to be levitating like a magic trick,’ Levy said.
That isn’t unusual for stocks that ultimately end up worthless. And it’s likely that many shareholders who are left in GM figure there’s no point in selling now.
But speculators who are thinking of buying should do the math. It just doesn’t work -- as GM insiders seem to have signaled with their sales in recent days.
-- Tom Petruno