Why Warren Buffett Is Buying Up GM Shares
Automaker has had a string of new product successes
The chairman of Berkshire Hathaway Inc. has sharply boosted his stake in General Motors, while cutting stakes in packaged food companies Kraft and Mondelez.
As of June 30, Berkshire had 40 million shares of the auto maker, according to a filing on Thursday with the Securities and Exchange Commission. That's up 60 percent from the stake Berkshire reported March 31.
Buffett is buying GM shares as the U.S. government is winding down its position in the automaker that resulted from the tax-payer bailout of GM in 2009. The government took a 61 percent majority stake in the company with about 500 million shares. At the end of 2012, the Treasury announced that it would begin exiting its position and hopefully be done with GM ownership by the beginning of 2014.
The United Auto Worker's healthcare trust is also a significant stakeholder, having swapped what GM owed it before the bankruptcy for shares in the company.
The Treasury reported last month that it has received net proceeds of about $877 million in July from its GM sell-off, which follows a sale of about $2 billion in June.
After Berkshire Hathaway, the next leading institutional shareholders are Vanguard Group with 35.6 million shares and State Street with 30.2 million shares.
The federal government now holds 136 million shares, a little more than a quarter of the 500 million share stake it took after the 2009 bankruptcy, in return for a $49.5 billion bailout.
Investor interest in GM has risen in recent months. Why? Reviews of GM's vehicles in the last two years by analysts and the media have been almost entirely terrific--Cadillac ATS, Chevrolet Cruze, Sonic, Impala and Silverado. The company is no longer burdened by dysfunctional brands like Pontiac and Saturn. It no longer is plowing cash into oppressive healthcare liabilities. And its China business is very strong -- much stronger than Ford's.
GM is benefiting from many third-party endorsements. J.D. Power and Associates in June said GM was the top-ranked automaker on its Initial Quality Survey for the first time ever. Last month, Consumer Reports magazine declared the Chevrolet Impala the market's best sedan.
GM shares have lagged the bull market that started in early 2009. But it recently hit a 52-week high of $37.71 after hitting a low of $19 in mid 2012. Some analysts have out a price target of $45 on GM shares.
Analysts and institutional investors like Buffett who watch GM have been generally positive about the lean operation that chairman and CEO Dan Akerson has run.
"Frankly, it's been a tough four years coming out the financial crisis we were in and a little bit of validation here and there is OK. But we've got a lot of work to do, and we've got to keep our heads down here and keep it going," GM President Mark Reuss told reporters this week at the Pebble Beach Concours d' Elegance.
If there is one area that GM is still struggling with it's the company's European operation. The Opel and Vauxhall brands are weak players and Europe has only this week officially emerged from economic recession, according to economic statistics reported by the European Union. That indicates that maybe Europe has hit bottom and is poised to start a climb back.
Buffett appears to be betting that the worst is behind GM, and following his long-standing advice of buying low and holding long when it comes to stocks.
Associated Press contributing.
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