WINDERMERE, Florida (Stockpickr) -- According to a number of news sources, the much-anticipated General Motors initial public offering should come to market sometime in late November. There are reports that GM could file registration forms for its IPO as soon as today.
The U.S. Treasury Department currently controls 61% of GM, or around a $49.5 billion stake in the auto maker. Clearly, the U.S. government would love to turn a profit on its GM stake since it's taken a lot of heat for bailing out the struggling auto maker.
One way the government could increase the probability of a higher GM share price is by pricing the IPO at a price that will attract more longer term retail investors. The company is looking to sell 365 million shares at the low price point of $26 to $29 a share, raising $9.5 billion to $10.6 billion. This low price point will look very attractive to retail investors, but in the end, the company will need to report solid numbers to increase its share price over time.
GM also plans to sell $3 billion of preferred shares that will be convertible into common shares in 2013. The preferred shares will also help to attract more stable longer-term investors into the stock.
If the company prices the offering between $26 and $29, that would place the market cap for GM at around $50 billion to $60 billion, which unfortunately would fall short of the $67 billion needed for U.S. taxpayers to break even on the position held by the Treasury. However, this is good news for the IPO, because the government is not going to sell a large amount of its stake at a loss. In fact, this should help to keep the government in the stock for longer than it might want, which will keep a lot of supply off the market.
Due to the size of the government's position in GM, it won't be able to cash in on its stake without putting massive sell pressure on the stock. I highly doubt the government wants this IPO to go off with issues like large drops in price, which will upset early investors. The government wants this IPO to be a success if for no other reason than to score some political points and show the naysayers that the bailout worked.
The government reportedly does plan to cut its stake from 61% to around 43% and hold the rest of the position in hopes that it can fetch a higher price at a later date. The government knows that it really has no other choice, considering the proposed IPO pricing range, but it might also know something that we don't: that there's large institutional demand for the IPO and that prices will eventually climb much higher.
My take here is that the government doesn't want this IPO to fail, at least not in the medium-term, for retail investors. A perception of confidence will be created by a successful GM IPO among the investing community -- as the old saying goes, "As GM goes, so goes the nation."
Of course, future higher prices for GM will largely depend on whether institutional money managers and retail investors decide to get heavily involved with the IPO. So as the IPO gets closer, keep an eye on the news to see if any large well-known money managers are expressing interest. I don't even think it's out of the question that someone like
would step up to take a stake in the automaker. This is pure speculation, of course, but I think the market might be surprised at some of the investors who end up getting involved. It could even be a way for some big players to win a few political points.
Since investors can't play the GM IPO directly just yet, it might be a very smart move to start moving into some auto and auto-related stocks ahead of the IPO for a trade. I expect a number of these stocks to trade much higher as investors gear up for GM's IPO.
With this in mind, here's a look at som
The most obvious play to make ahead of the GM IPO is to take a position in other automakers and competitors to GM, such as
Ford Motor is one of my favorite ways to play the GM IPO. Ford went the free-market route during the economic crisis and didn't take any bailout money from the U.S. government. The company has turned things around the hard way and has since reaped the rewards of new product lines and sound management.
Ford has a market cap of $49 billion and trades at a forward price-to-earnings of just 7. Over 8% of the tradable float of 3.32 billion shares on Ford is currently sold short by the bears, so a massive short squeeze could develop as GM's IPO approaches. From a technical perspective, watch for a breakout above $14.50 for confirmation of a major move higher in Ford.
I don't love playing Toyota and Honda as much as some of the others because there is a lot of currency risk due to the strong yen. Just recently, the yen/dollar cross printed all-time highs, which is going to put a lot of pressure on both of these firms' earnings, but both stocks will still probably trade up into the GM IPO as sympathy plays.
Toyota has a market cap of $110 billion and trades at a forward price-to-earnings of 15. Honda has a market cap of $62 billion and trades at a forward price-to-earnings of 11. Recently, the Japan Automotive Dealers Association reported that Japan's domestic sales for new autos dropped 23.2% in October compared with the same period last year. Toyota's saw sales drop 24.2% for the month, excluding the Lexus brand, and Honda Motor saw sales fall 29.2%. Both stocks took a hit on that news, so now could be the time to buy the dips and play them both into the GM IPO.
From a technical perspective, Toyota has some support at around $69 a share. If the stock can manage to trade above the 50-day moving average of $70.81, then it should be able to trade back towards the 200-day moving average at around $74 a share. Honda doesn't look that great technically, but if the stock can manage to hold its 200-day moving average at $33.45, then it should be able to rally ahead of the GM IPO.
Tata Motors is an Indian-based automaker with a market cap of $16 billion. This stock, which trades at a forward price-to-earnings of 9, has been a big winner year-to-date, with shares up 67%. Watch for a breakout above $29 a share for confirmation of continued strength in Tata Motors.
If you're looking for a speculative automaker that could really move on off the GM IPO, then I would take a serious look at trading
. This company designs, develops, manufactures and sells fully electric vehicles and electric vehicle powertrain components. Just recently, the company won a $60 million contract from Toyota to develop a version of Toyota's RAV4 small crossover vehicle.
Tesla Motors isn't profitable yet, but you must consider that this high-tech automaker is still in the early stages of using the money it received from its IPO to develop and launch new products. The stock is also heavily shorted, with around 7.3% of the tradable float of 39 million shares currently sold short by the bears. From a technical perspective, watch for Tesla to break above $22 to $23 a share for a sign that the stock could be ready to make a big move higher.
Another potential great way to play the GM IPO is to buy the auto-parts makers. Names that market plays should consider include
Standard Motor Products
Johnson Controls, which provides batteries for automobiles and hybrid electric vehicles, along with related systems engineering, marketing and service expertise, has a market cap of $23 billion and trades at a forward price-to-earnings of 12. So far in 2010, Johnson Controls is up 29%, and as the GM IPO grows closer, I think the stock will add even more gains. From a technical perspective, watch for shares of Johnson Controls to trade above $35.77 a share for confirmation of more upside.
Lear also looks solid as a GM IPO play. Just recently, the company reported third-quarter results that beat Wall Street expectations. Lear also raised its 2010 sales guidance to around $11.7 billion, up $700 million from its previous forecast. The company has a market cap of $4.4 billion and trades at forward price-to-earnings of 11. Lear also has a solid balance sheet, with $1.42 billion of total cash and $720.70 million of total debt, which equates to a net cash position of $718 million.
From a technical perspective, shares of Lear recently broke out above $85 a share on big volume. I think this stock is setting up to head toward $100 a share in short order.
The bottom line: I think the auto and auto-related stocks are going to trade higher into the GM IPO. I would look to buy any of these names that meet your criteria on weakness. Then, once the GM IPO hits the market, look to sell them into strength for some quick profits. That strength could last a bit longer if the GM IPO is a successful one, which I think it will be.
To see more potential GM IPO plays, including
, check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.