(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
General Motors Co. (GM) stock has been in rally mode since the end of March, rising by more than 17% on news that Softbank Group Corp. will invest billions of dollars in GM's autonomous driving business. But those gains may fade as reality sets in that growth prospects for the company are at best mixed in 2018 and appear to be weakening for 2019, as trade tensions rise. The technical charts are reflecting this bearish sentiment and suggest the stock will fall by about 9% in the coming weeks. (See also: Trump's Tariffs Would Hurt Nearly Every Segment of Auto Industry: Moody's.)
Shares of the automaker skyrocketed higher by nearly 13% to almost $43 on May 31 after Softbank, the Japanese conglomerate, invested $2.25 billion in GM Cruise Holdings, GM’s autonomous driving unit. Shares of the stock continued to rally in the days following to nearly $44 but have since retreated, falling by about 9% to a current price of $40.85 as trade tensions, and fears of new tariffs, take center stage.
Refilling the Technical Gap
The announcement of a significant investment from Softbank caused shares of GM to jump, creating a technical gap in the chart. The stock now appears to be working its way lower to refill that gap. Should that happen, the stock would give back all the gains following the announcement, falling back to $37.25, a decline of about 9%, and nearly 17% off the intraday highs on June 12 at $44.95.
Momentum Moving Out
The relative strength index (RSI) has also been trending lower since peaking at nearly 80 on June 11. The RSI would need to fall from its current level of about 43 to almost 30 before reaching oversold conditions. Volume levels in the stock have been steadily declining since shares peaked as well, and that suggests buying interest is coming out of the stock.
The outlook for the company doesn't promote a bullish outlook either and is perhaps the core reason why shares have been in retreat recently. Analysts are looking for revenue to rise by about 8.5% to roughly $145 billion, but earnings are seen falling by 3% to $6.42 per share. The mixed outlook for 2018 gets worse in 2019 with both earnings and revenue expected to remain flat.
But for the first time in 2018, analysts, who had previously been upping their estimates for the company, have now started lowering their outlooks for 2019. Since June 1, analysts have trimmed their outlook for both revenue and earnings by 50 basis points for their 2019 forecasts, a notable change in trend.
The current weakness in the technical chart appears to reflect a potentially deteriorating outlook, and unless some resolution or clarity comes around the future of global trade, GM shares may continue to suffer.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.