I Warned You About General Motors

NEW YORK (TheStreet) -- Shares of General Motors (GM) continue to be pounded lower and lower, finally breaking below $34 last week and closing Friday at $31.93, near its low that day. The last time the stock saw a price that low was in June of 2013.

The latest round of news includes controversial and inconclusive allegations that CEO Mary Barra knew about the faulty ignition switch issues in 2011. The company also announced that the recall will now cost $1.3 billion, not $750 million like investors were previously told. 

Despite the pushback, "you're an idiot" slanders and general uproar I received by going against the crowd, I have argued that this recall situation is far from over.

The stock has not gone down enough since the U.S. Attorney General announced its criminal investigation in mid-March. 

Investors can blindly argue that they simply bought the stock based on the news that was public at the time. But it was easy to see from the start that this issue was going to involve more than 1.6 million cars and $350 million, the initial estimated cost for the recall.

Since then, the company has recalled almost 7 million cars (many, admittedly, for other reasons than the ignition switch). That will now cost the company $1.3 billion. An additional $300 million restructuring charge in Europe, Australia and Brazil, coupled with a $400 million currency loss in Venezuela, will hurt as well.

GM's first quarter will likely be the worst since 2009. 

An analyst at Barclays expects the automaker to report pre-tax earnings of $437 million, according to the Detroit Free Press. 

The stock has taken a beating, no doubt. But it has deserved to take a beating. The stock is down 20% year-to-date and trades at just 6.81 times fiscal 2015 earnings. 

The valuation is low. But remember, the valuation for General Motors -- and all automakers with the exception of Tesla Motors (TSLA) -- is always low.

The automakers never trade with the same valuation as the S&P 500 . So it's important to remember that the auto stocks are always cheap by this standard, and can always get cheaper. Valuation alone is not a reason to buy the stock. 

From the start, I have said that I am a buyer of GM between $30 and $32. The stock finally declined to that range on Friday. 

The reason I wasn't a buyer before was simple: the recall was likely to get worse before it got better.

That played out, and now that the company's first quarter earnings are expected to get drilled. 

However, General Motors still faces two major headwinds: a settlement with the Justice Department and a possible compensation fund for victims. 

The settlement with the Justice Department is likely to be north of $1 billion. Many investors are comparing it to Toyota Motors' (TM) similar "recall coverup," which recently resulted in a $1.2 billion settlement

General Motors' recent decision to retain Kenneth Feinberg, an attorney who specializes in orchestrating victim compensation funds -- such as settlements after the Boston bombings, the September 11 attack and BP's (BP) oil spill -- demonstrates that the automaker is at least considering setting up some sort of fund. 

It's a difficult call. On one hand, I know and like many people who work at General Motors. 

On the other hand, the company has made dire mistakes that are going to cost it dearly. That spells trouble for the stock. 

GM stock is finally in my buying range. It sports a healthy dividend yield of 3.7%, has a low valuation and a strong auto market. Things could be worse, despite what it seems. 

Mostly, I'm waiting for that scared-money washout, where the stock rapidly sells off, finds a solid level of support and then rockets back higher -- all in one session. 

Nibbling here with a starter position is okay. I'm also still in the camp that thinks we could see shares of GM closer to $30 in the not-so-distant-future. 

The selloff came, and investors are finally starting to read between the lines about how bad this situation really is. Thankfully, it finally appears that they're starting to price in some of the company's true risks.

At the time of publication, Kenwell held no positions in any of the stocks mentioned. 

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.

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