The New GM

08/14/2015 8:00 am EST

Focus: STOCKS

Chloe Jensen

Chief Analyst, Cabot Dividend Investor

With the market dramatically bifurcated and commodities and interest rate-sensitive investments underperforming, we’re going fishing in the value pond with our latest recommendation, suggests income expert Chloe Lutts Jensen, editor of Cabot Dividend Investor.

General Motors (GM) is an undervalued company in the midst of a turnaround.

The automaker is a household name in the US, but these days the stock is associated more with the 2008 auto industry bailout than with its past as a must-own blue chip. But GM has changed since the bailout.

It has grown revenues in every year of the past five, averaging 4% growth per year. Most recently, low gas prices have driven consumers back to GM’s trucks and SUVs, boosting sales and margins.

In the second quarter of 2015, adjusted EPS grew 122% year-over-year, beating analyst estimates by nearly 20%.

Analysts are still concerned about the slowdown in China. Also weighing on the stock is the US Justice Department’s investigation into how GM handled recalls of cars with faulty ignition switches last year. The case could result in GM facing a monetary settlement of over $1 billion.

The stock’s current P/E ratio is under 12, while its forward P/E is in the basement at less than 7. And the  price-to-book ratio is very reasonable at only 1.4.

The new GM is still young and somewhat unpredictable and the company’s turnaround plan is still in progress. However, the current yield of 4.6% makes it easy to wait for investors to start coming back to this name.

The new, post-bailout company declared its first dividend in January 2014 and has paid six quarterly dividends to date, raising the dividend for the first time this past April.

Investors with high risk tolerance who value high current yields and high potential for long-term capital appreciation and dividend growth can buy at current levels.

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