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GM IPO might lure brave despite bad economy

NEW YORK — Would you buy stock in a company that has hemorrhaged tens of billions of dollars for years and has run through three bosses in quick succession just because it has turned a profit for a few months?

That is essentially what General Motors will ask investors to do when it takes itself public again with one of the largest initial stock offerings ever. With the stock market already on edge, it's a lot to expect.

The good news: Longtime investors say buying during bad times is the best way to make money with auto stocks, provided you have a stomach of steel. And for the brave, GM might offer a perfect opportunity.

"The stocks look expensive when profits are low, but that's traditionally when you should get in," Standard & Poor's analyst Efraim Levy says.

GM filed papers last week with regulators detailing its plans to return to the stock market. It didn't specify a date, but experts say the offering could come as early as October.

The company earned $1.3 billion from April through June, its second profitable quarter in a row and a remarkable turnaround since its 2009 bankruptcy. Investors in initial public offerings, or IPOs, like to see several quarters of earnings, especially from manufacturers.

GM also said chief executive Ed Whitacre would be leaving Sept. 1. He will be replaced by board member Daniel Akerson, who will be the fourth CEO in 18 months. And GM has the misfortune of planning an IPO when demand for new public shares remains low.

Still, U.S. car makers have proved to be good investments if you get the timing right. That is the conclusion of McGinn Investment Management, run by self-described "contrarian" investor Bernie McGinn, after studying five-year returns for investors who put money into GM and Ford a year before the start of recessions. The firm looked back over three decades.

Over the five years that began in July 1980, GM and Ford stock rose 83 percent and 185 percent before dividends, respectively, versus a 58 percent gain for the S&P 500.

They also beat the broader market in the years surrounding the early-'90s recession. GM stock rose 38 percent and Ford 51 percent. The S&P: 29 percent.

McGinn started his calculations a year before recessions because stocks tend to slump in anticipation of economic slowdowns. Many economists think the recent recession ended a year ago, so it's not clear that the trend here could apply to GM shares. Then again, stocks are still down sharply from before the recession, and fears of another downturn are rife.

The exception to the winning pattern was the period surrounding the dot-com stock bust and subsequent recession. The S&P fell 19 percent in the five years between March 2000 and March 2005. But the two carmakers lost more than twice as much as investors pummeled them for spending too much on salaries and benefits and not coming up with enough hot cars.

"The question now is, has the American auto industry turned the corner?" says McGinn, who has been managing money for 30 years. "Do they have their costs in line? Do they have focus?"

McGinn, who owns Ford shares, thinks U.S. car makers have improved. But he says he will wait until GM announces the price of its stock before deciding whether to buy.

So, do you buy GM or not? It's too early to tell, of course, until a price is set. But Kirk Ludtke, an analyst at CRT Capital Group, argues that GM could be worth more than ever in the stock market.

He says many car makers over the years have been valued by investors at five times expected cash flow. Investors like to focus on cash flow because, unlike profits, it ignores costs for which money never changes hands, such as wear and tear on factories.

Ford recently traded at five times, Toyota at 5.7 times. So to estimate GM's market value, Ludtke multiplied its $13 billion in expected cash flow this year by five, then added the company's cash and the value of stakes in subsidiaries among other adjustments.

The final figure: $82 billion — $25 billion more than GM was valued at by investors at its peak stock price in 2000.

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