General Motors, which raised at least $20.1 billion in an initial public offering, is to carmaker FordMotor what financial company Citigroup is to JPMorgan Chase, some mutual-fund managers say.
GM , like Citigroup , needed a bailout by the government, which holds a stake in both companies.
Ford was the sole U.S. carmaker to make it through the recession without government help; and JPMorgan , while being forced against its will to take bailout money, has emerged as the strongest U.S. bank because of its superior risk controls.
Many investors were hot on the GM IPO, which came at a time when consumers started getting ready to buy big-ticket items again. GM had raised the proposed deal size for its IPO to 478 million shares, an increase of 31% from the original proposal. Last night, GM said in a statement it priced the shares at $33.
Still, some fund managers are sticking with Ford shares, which have rallied a staggering 660% since January 2009. GM filed bankruptcy on June 1, 2009.
That's because of the overhang of government ownership. Frank Ingarra, co-portfolio manager at Hennessy Funds, says he finds better opportunities in other automotive stocks rather than trying to buy into something "where the government is only selling a small part of its position."
"Whenever the government is involved in something, I get uneasy," Ingarra says. "A lot of the money raised goes back to the government, to the unions, and to all of these other entities."
Ingarra says Hennessy Funds, which uses quantitative data to screen 10,000 companies, requires a full year of recent public data.
Hennessy Funds isn't alone. Tom Villalta with the Jones Villalta Fund says GM suffers from the same perception problem as Citigroup, a company in which government ownership remains a specter over the shares.
JPMorgan's shares are little changed in the past two years, having made up all their losses from the stock-market crash, while Citigroup is down more than half.
"It's going to be years before Citigroup gets to the level that JPMorgan is at, just from a perception standpoint," Villalta says.
"Not everyone agrees that GM will have trouble getting a jumpstart: Josef Schuster, principal portfolio manager of Direxion Long/Short Global IPO Fund, goes against the tide..."
"The government may be out by the middle of next year, but that perception is going to stick with them for a number of years. That's true for GM as well."
Villalta says the Jones Villalta Fund, with $45 million in assets and 35 stocks in the portfolio, has counted on Ford for gains. Villalta says the firm has held Ford shares since late December 2008 and it accounts for 3.5% of assets.
"We like Ford a lot," he says.
"In our view, Ford is the better way to play it. GM will be at a little bit of a better advantage from a capital-structure standpoint. But our feeling is that the momentum is with Ford right now."
Villalta notes that Ford was bold enough to kill off the beleaguered Mercury brand, while GM sells cars under the Chevrolet, Cadillac, GMC and Buick names.
"That tells me Ford gets it, and now I'm really enthused that the company understands where it's headed and how to structure its operations," he says. "GM got rid of brands that were underperformers, but I still think they're brand-heavy."
Ingarra agrees, noting that Ford Motor is a key holding for Hennessy Funds, which has $875 million in assets under management. Ford is part of the firm's Cornerstone Fund since it was purchased in December 2009 as it meets a list of criteria that includes a market cap greater than $175 million, improved earnings, stock-price appreciation, and a price-to-sales ratio below 1.5.
Not everyone agrees that General Motors will have trouble getting a jumpstart. Josef Schuster, founder of IPOX Capital Management and principal portfolio manager of the Direxion Long/Short Global IPO Fund, says the pre-IPO action has shown GM has done a good job at marketing the offering.
"What really sets them apart from other IPOs is that they went through the process of releasing a lot of fundamental information, like forward-looking statements and earnings," Schuster says. "That's unusual in IPOs before they go public."
At $33 a share, GM is valued at 7.8 times 2010 earnings, based on the first nine months of the year, according to Bloomberg. Ford trades at 8 times estimates for 2010 profit. As GM racked up $82 billion in losses from 2005 to 2008, Ford has become the world's most profitable car company this year.
Schuster says Direxion Funds participated in the offering and expects to get some shares at the initial price. "Based on its weighting, we'll buy more in the aftermarket," he adds.
The real driver of the GM IPO, Schuster says, was hedge-fund interest. He expects hedge-fund managers to flip GM shares after a few months. "This is such a large offering, and if you can get a 10% or 15% return on a small allocation at the end of year, it can help the performance," he says. "That's driving the interest and why you're seeing an oversubscription to the deal."
Schuster expects GM shares to do well initially, gaining 15% to 17%. "I expect limited downside risk at the moment, unless the whole market is going to fall apart and the global economic picture changes in the short term," he says.
Despite the enthusiasm for GM shares from many investors, Villalta doesn't expect much of an impact on Ford shares.
"They're on a nice upward trajectory, and I don't anticipate that it will be derailed," he says.
"With that said, you have a competitor for investor dollars in the marketplace. Certainly, you're going to have people making some tradeoffs, as far as where the value is. People might decide to take some gains in Ford and get into GM."
Hennessy Funds' Ingarra instead suggests that investors look at five automotive-related stocks that met qualifications of a screener for inclusion of the Hennessy Focus 30 Fund, which takes the same approach as the firm's Cornerstone Fund but only looks at mid-cap companies.
Those five stocks are Autoliv , BorgWarner , Tenneco , TRW Automotive and ArvinMeritor . Despite the fact that these stocks have run 50% to 100% higher in 2010, Ingarra says they should still outperform.
"For us, having five stocks out of the 30-stock portfolio in the automotive sector seems very significant," he says. "But it makes sense. We had one of the worst recessions in a long time. Many of the automobile manufacturers and parts supplies went bankrupt. So the competition is a lot less. The ones that survived are starting to benefit after cutting to the bone."
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