(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
General Motors Co.'s (GM) stock has fallen by more than 16% so far in 2018 but the slide is far from over. Some options traders are betting shares fall further by the start of early next year by as much as 10%.
The pessimism is reflected in a weak technical chart that too suggests further declines. That may not even be the worst of it. Analysts have cut their earnings estimates for the company since the beginning of May while slashing their price targets. Worse still, price targets may need to fall even further. That's because those targets on average are 37% higher than the stock's price around $34.50 as of the close of September 6, 2018.
The number of open put options set to expire on January 18 at the $35 strike price outweighs the number of open call options, by a stunning 7 to 1 ratio. It is no small wager either, as the almost 53,000 open puts have a dollar value of more than $12 million. With the options trading at a price of $2.50 per contract, a buyer of the puts would need the stock to fall to $32.50 to earn a profit if holding them until expiration. Worse still, are the 35,000 open put contracts at the $32 strike price. With a cost of $1.15 per contract, the stock would need to fall to $31.25, a drop of almost 10%.
Another bearish sign for GM is the technical chart, which also suggests further declines. The stock has fallen below critical technical support around $34.70. If the stock falls below $34, it is likely heading lower to the next level of technical support around $32.20, a drop of more than 6%.
All the bearish sentiment points to a weakening fundamental forecast for the company. Since the beginning of June, analysts have slashed their earnings estimates by almost 7% to $5.98. This is a 10% decline compared to 2017. What's even worse is that 2019 earnings estimates have dropped by more than 7% and reflect no growth from 2018.
Revenue estimates have remained unchanged and are forecast to rise by 8% in 2018 to $144.5 billion. However, growth is estimated to slow in 2019 to just 1% with revenue rising to $146.1 billion.
At this point, there is a big gap between the stock's current price and its price target suggesting that the target may need to be tempered. But remember, that target has fallen by almost 6% since early June, though it is clear that it will need to fall further.
For now, GM's stock appears it has, at the very least, a rocky road ahead.
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.