General Motors stock gyrated between positive and negative territory Monday to close at a loss as it started its first full week of trading as a reborn company.
Analysts said the reason is a combination of hedge funds taking profits and other investors jumping in as the price dips, and they expect volatility to last for several more days.
GM stock closed Monday at $34.08, down 18 cents per share, or 0.5 percent. It dropped as much as 45 cents to $33.81 in the morning, but it rebounded to a gain and continued to move above and below break-even all day. At one point it hit 22 cents above Friday's close of $34.26. Volume was around 36 million shares, far below the more than 400 million trades in GM stock on Thursday.
The stock movement comes just two business days after General Motors Co. pulled off an IPO worth $15.8 billion, signaling the surprising resurrection of an American corporate icon that collapsed into bankruptcy protection and was rescued with a $50 billion bailout from U.S. taxpayers.
Volatility will likely continue for at least a few more days because stock markets have been unstable of late and as hedge funds continue to take profits and other traders search for bargains, said Joe Phillippi, a former Wall Street analyst who is now president of AutoTrends Consulting in Short Hills, N.J. He also said investors could be buying with the expectation of a pop in the price because GM should make its way back into the Standard & Poor's 500 index shortly. Membership in the index is important because many mutual funds buy shares based on it.
"The hedge funds are obviously big players. They're flipping. They used their muscle to get big strong allocations" in the IPO, Phillippi said. "You may very well have a lot of portfolio managers buying the stock when it dips, figuring that it's going to be put back into the S&P 500 soon."
On Monday, Standard & Poor's began covering the new GM stock by recommending that investors hold it. Analyst Efraim Levy set a 12-month price target of $36 and wrote that he expects earnings per share of $2.78 in 2010 and $3.62 in 2011. GM earned $2.62 per share through the first three quarters of this year.
He based his recommendation on GM's lower operating and borrowing costs after leaving bankruptcy protection, and a greater focus on its remaining four brands. GM got rid of Hummer, Saab, Pontiac and Saturn and now can focus on Chevrolet, Buick, GMC and Cadillac. Levy predicts U.S. industry sales next year of 13 million, up from 11.5 million expected this year.
Monday's trading was similar to but not as dramatic as Friday's. At the opening bell that day, the stock fell $1.08 to $33.11 as investors sold to lock in profits. The stock recovered after nearing the IPO price of $33 per share, leading some analysts to speculate that large investors stepped in to stop it from hitting $33, a price that could trigger computerized "stop loss" orders to sell. Friday's early drop also could have been halted by investors who jumped in to buy at a relatively low price, the analysts said. It ended the day up 7 cents, or 0.2 percent, at $34.26.
Phillippi said the large investment banks will do whatever it takes to keep the price above $33 and avoid triggering any computerized sell orders. Even though they cannot buy stock under Securities and Exchange Commission rules, they can legally talk to big investors and persuade them to buy, he and others said.
Messages were left with spokeswomen for JPMorgan and Morgan Stanley, the two lead underwriters in the GM IPO. On Friday, Morgan Stanley would not comment on whether it took action to stop GM's stock from dropping, while a message left at JPMorgan Chase & Co. was not returned. GM also would not comment Monday.
In the IPO, GM's owners, mainly the U.S. government, sold 478 million shares at $33 each. Shortly after the opening bell on the first day of trading Thursday the price jumped as high as $35.99, then pulled back later in the day. GM ended Thursday with a gain of 3.6 percent at $34.19.
The government is on its way to getting back at least part of the $50 billion it spent bailing out GM, which emerged from bankruptcy protection last year with a balance sheet cleansed of huge debt. GM's debt was reduced to $8 billion from a staggering $104 billion in the bankruptcy process.
The leaner company earned $4.2 billion in the first nine months of this year, and its chief financial officer said it could post huge pretax profits if the U.S. auto market recovers to pre-recession highs.
The government made $11.8 billion by selling 358 million shares at $33 apiece in the IPO, and reduced its ownership stake in GM to about 36 percent from 61 percent. It stands to make $13.6 billion, and lower its stake to 33 percent, if bankers exercise options for 54 million more shares. If the options are taken, the government will have 500 million shares left, and they must sell for $53 each in order to get all the bailout money back. Those options could be exercised this week.
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