Stutland: Is GM the Car Stock That Could Go Into Reverse?
President, Stutland Equities
This is a Guest Blog from CNBC Contributor Brian Stutland.
Shares of General Motors have been on a tear since July, but sold off more than four percent yesterday, as investors digested the company's potentially weaker earnings outlook in 2013.
In 2012, U.S. new car and truck sales reached a five-year high of 14.5 million, and expectations are for 15.5 million in 2013. The reason for these high expectations out of the U.S. auto industry is that credit is becoming easier to get, interest rates are low, and the average age of a car on U.S. roads is about 11 years old – so many people are apparently overdue to buy a new one.
However, the company said on Tuesday night that they could see lower profits and margins in the first half of 2013.
This had one option trader turn bearish, and spring for 5,000 March 29-strike puts, which cost $1.32 each. This was done with the stock at $29.01, and the break even for this trade is $27.68, or 4.5% lower.
Yesterday, European car sales were released, and most markets showed a sales decrease of 10% to 15%. This puts demand for new cars at the lowest level since 1995, as the recession takes its toll on consumer spending. GM is fighting to keep losses in Europe contained so that it can focus on more profitable markets like the U.S. and Asia. But Europe will certainly be a drag on the company's margins in the first half of 2013. In addition to this, the U.S. Treasury has announced that it will sell $200 million worth of GM shares at back to the auto maker at $27.50 a pop. This could put pressure on the stock, and cause a retracement back to the $27.50 level.
For investors who are looking to protect their GM stock position from a potential market sell-off around the debt ceiling debates, or due to worse-than-expected earnings from the company, buying the March 29-strike puts will be effective. This also happens to be quite an elegant trade, because the break even price of the puts coincides with the Treasury's sale price, as well as the upper end of the stock's gap up on December 19th. If the stock tries to fill that gap, shareholders will feel much better if they have protected themselves by buying these puts.
Disclosures: I have no position in GM.
Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."
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