GM comes in at number one to wrap up this week’s countdown of the top five S&P 500 stocks to own for 2015. If there’s one company looking forward to putting 2014 in its rear-view mirror, it’s GM. The company was rocked by an ignition switch scandal for the ages that sent shares lower 15%. But this year is different, and GM is not only fundamentally well positioned but also grossly undervalued. The recalls are essentially behind them, and all that’s left to be determined is how big of a fine GM will be slapped with. Whether it’s $500 million or $2 billion is of little consequence as GM has $28 billion worth of cash on its balance sheet, and generates $6 billion of free cash flow a year. It’s also a much leaner, efficiently-run company, sporting capacity utilization north of 90%. But the number one reason to buy GM is for its dirt cheap valuation. While it’s historically traded in lockstep with Ford, it’s currently trading at a 15% discount on a price/earnings basis and 60% discount on enterprise value/EBITDA basis. This is completely undeserved, as GM is taking huge amounts of market share from Ford. While GM grew sales 20% in each of the past two months, Ford’s sales declined in November and came in flat in December. Behind share gains and a strong auto cycle, I expect GM to earn $4.80/share next year which, applying a conservative multiple of 10x earnings, results in a $48 share price, or 33% gain from today’s price.
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