General Motors or Ford: Which to Buy?

NEW YORK (TheStreet) -- With all of the challenges facing General Motors (GM), I haven't exactly been the most optimistic investor in town. I've expressed that not-so-bullish opinion several times, usually receiving quite a bit of pushback from others.

But that's OK, as long as I help at least one investor. I'm not necessarily saying don't buy shares of GM. I'm definitely not saying to short it. I just think a lot of investors are discounting the obstacles at GM, calling the stock a buy solely because it has a low valuation.

But the stock has always had a low valuation. So has another similar stock, Ford (F).

Ford trades at a trailing 12-month price-to-earnings ratio of 9.1 and a forward 12-month P/E ratio of 8.4, while GM trades at 14.6 times trailing earnings and a slightly cheaper 7.2 times forward earnings.

While GM is technically cheaper, Ford is pretty darn cheap, as well. Furthermore, GM should be cheaper than Ford, considering the recalls and criminal investigations. 

The two stocks are similar. For starters, each company is led by a respectable CEO. Ford has Alan Mulally, a logical, battle-proven leader who steered Ford clear of bankruptcy in the Great Recession.

Then there's Mary Barra, CEO of GM. Barra took over as CEO earlier this year and does not have the pedigree that Mulally has. But Barra has proven that she can handle being in the spotlight under immense pressure -- and still do the right thing.

Each company pays a handsome dividend. Ford's dividend yields 3.1%, GM's 3.4%.

And although GM has a more established base in China, both companies are benefiting from the expanding middle class and strong auto sales in the country. The similarities don't end in Asia.

Both automakers are seeing improvements in their European operations, while U.S. auto sales continue to hum along, pushing ever closer to the coveted 16 million seasonally adjusted annual rate, or SAAR.

Although GM looks like a tremendous buying opportunity compared with Ford based on year-to-date numbers, the one-year chart shows that GM appeared to have gotten a bit ahead of itself in late 2013 and finally come back down to earth. Have a look for yourself:


GM ChartGM data by YCharts

1-Year Chart:

GM ChartGM data by YCharts

Usually in a situation like this one, the trade is to buy the underperforming stock -- GM in this case -- and sell the outperforming stock, or Ford.

The strategy is known as a "Pairs Trade," and can take weeks or months to play out. The rationale is that the two stocks will revert to the mean of performance.

In plain English, Ford would decline and GM would appreciate, giving the investor a double win so to speak, while limiting downside risk.

This scenario is different, though, because GM deserves to be cheaper. I wouldn't expect Ford to decline simply for the reason that it has outperformed GM. 

GM is shelling out enormous amounts of money to make its recall issues and criminal investigation worries go away. The company is facing a plethora of first-quarter charges: $750 million for recall repairs, $400 million for currency swings in Venezuela, and $300 million for restructuring costs in Europe, Brazil and Australia.

To be fair, Ford faces a $350 million charge for its own currency issues in Venezuela.

Furthermore, GM still potentially (and likely) faces payments to a victims' compensation fund and settlement costs with the Justice Department, each of which will likely run into the billion dollar range.

Ultimately, the company will likely lose several billion dollars because of the recalls.

A few billion dollars may seem irrelevant to a company the size of General Motors. But consider that the company made only $3.8 billion in profits in all of 2013.

When choosing between two automakers that share similar positive qualities, I'm going to stick with Ford, the one that doesn't bring the Justice Department, multi-billion fines and negative publicity with it. After all, I don't think shares of GM will rally at the expense of Ford.

 At the time of publication, Kenwell was long Ford.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

-- Written by Bret Kenwell in Petoskey, Mich.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

If you liked this article you might like

Jim Cramer: When There's Nothing to Buy, People Sell

Jim Cramer: When There's Nothing to Buy, People Sell

Why Self-Driving Cars Are Still the Future Even After Uber Tragedy

Why Self-Driving Cars Are Still the Future Even After Uber Tragedy

Goldman Sachs Has a Sinister View on Tesla's Next Two Years

Goldman Sachs Has a Sinister View on Tesla's Next Two Years

Qualcomm Ex-Chairman's Leveraged Buyout Bid a Real Long Shot

Qualcomm Ex-Chairman's Leveraged Buyout Bid a Real Long Shot

Why Does Tesla Have Such a Hard Time Making Cars?

Why Does Tesla Have Such a Hard Time Making Cars?