I’ve been writing about the divergence between the fundamentals of our businesses that we are invested in versus the stock prices due to a recent market panic. To dive deeper into this I wanted to touch on General Motors common stock. This is a position we have done well in over the years through the sales of puts, purchase of stock, and sales of covered calls. Currently, the stock trades at about $30 per share, after dropping below that price recently. Just today the company raised its earnings forecast for 2016 by 25 cents per share, to adjusted earnings per share of $5.25-$5.75. On the high side that puts the stock right around 5.2 times forward earnings, which is absurdly cheap. In addition to this, the company raised its stock buyback from $5 billion to $9 billion. The company is able to do this because it is in the best financial condition in decades. This is not the same GM that existed prior to the Financial Crisis. Costs are far lower as is the breakeven level at which the company will be profitable. I do believe North American auto sales likely peaked in 2015 but Europe and South America have major room for improvement, and 2016 should be a pretty strong year overall.
Stock buybacks at current prices are the best use of capital, as it increases our per-share ownership of the company. GM also raised its quarterly dividend to 38 cents from 36 cents. That means the current dividend yield is just above 5%! Now through selling puts that have either expired or that we have exited profitably we have generated income. On the puts we’ve still held and are likely to be exercised on, we are getting in at prices that we deem to be highly attractive and now we have all the upside or downside that comes with the stock, including the big dividend. On our long stock and the stock that we will be owning due to being exercised on sold put options, we will have the opportunity to sell calls. This allows us to set the price at which we are willing to sell the stock and for doing that we can collect additional income. On a cheap 5% yielding stock, it is not hard to see double digit per annum upside potential in what is still a fairly pricey market.
At T&T Capital Management, we are not invested in just the market. We are invested in individual securities and we take concentrated positions ranked by our highest conviction opportunities. This is no different than the way that Warren Buffett managed his investment partnership when he generated his most explosive returns of his career. It does lead to more volatility from time to time but that goes both ways and is not something that should be unexpected. We don’t need an incredible stock market to do well. We just need our companies to perform the way they should. With our current positions, barring an immensely severe recession, we should do very well over the next 3-5 years. While the overall market needs strong earnings growth or multiple expansion, both of which are unlikely to occur in the short-term. We just need the world not to blow up. Banks below tangible book value, leading auto manufacturers at 5 times earnings, it is rare you get stocks that are so cheap.
In every panic there are the charlatans that proclaim the end of the world. They only have to be right once to gain some status as an oracle from the activity-motivated financial media. If we panicked and sold every time stocks were expected to crash we would have never made any money in the first place. Just as silly, many of these prognosticators expect things to unfold the same way as they did in the last crisis. That is highly unlikely. The banks and insurance companies are nothing like they were a decade ago. GM is healthier than it has been in decades. Housing is not super cheap but is far from a bubble in most areas. By focusing on the fundamentals, I’m extremely confident that we will overcome short-term challenges and protect and grow our capital. Keep in mind that much of the stock market is already in a bear market. Apple is down 25% from its highs. Berkshire has done poorly. The biotech stocks have gotten killed. Transports and manufacturing are in bear markets. Even after the declines, these investments are much more expensive relative to ours in terms of value. Over time these investment opportunities, which we have and are buying more of will have seemed very obvious once the emotion and psychology that pervade the current environment dissipates.