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I knew the proposed swap was boosting the price for GM, since one could essentially buy shares in Hughes for less by buying GM instead and then swapping the GM shares for Hughes. But I didn't expect such a dramatic drop in GM's price. In retrospect it seems kinda obvious. When demand goes up, price goes up. When demand drops, so does the price. Duh.
GM has gone from being our best-performing stock (on an annualized basis -- J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> is the best over the portfolio's life) to a money loser in two short weeks. Bummer. In the process, it has dragged the Foolish Four down from beating the market by 2% to 3%, to losing to the market by almost the same margin.
What a difference a fortnight makes.
In retrospect it looks like GM's great performance over the last few months was mostly due to the pending Hughes swap and the fact that it owned a lot of Hughes, the DirecTV company that has yet to turn a profit. Now that it owns less of Hughes, GM has lost some of its glamor and is back to being a car maker.
GM's rise on a day when the market barely budged was probably related to a forecast of strong earnings growth from Fiat, which GM will have a 20% stake in once a planned exchange of shares goes through next month. GM will exchange 6% of its shares for 20% of Fiat in July. (The original deal was for 5% of GM, but with the reduction in GM shares outstanding that occurred when the GM swap took place, the percentage went up.)
Maybe it was the Fiat news or maybe investors just realized that with a P/E ratio of 8, GM is incredibly underpriced, as are competitors Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> and DaimlerChrysler AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DCX)") else Response.Write("(NYSE: DCX)") end if %>. GM may not be the most innovative company on the planet, but it sure churns out cash, in the form of both earnings and dividends.
The automakers seem to be suffering from the stigma of being "old economy." Old economy companies manufacture real things that you can hold in your hand and make use of -- stuff made of plastic and metal. New economy companies deal mostly in information and its related infrastructure. Most of that information is in the form of electrons, which are pretty insubstantial entities, weighing 1/1871 as much as a proton, which isn't much to begin with.
Much as I love new economy companies, I have a hard time seeing them as intrinsically more valuable than companies that make THINGS. Heck, what's the first thing those new Internet millionaires buy? A new CAR!
But my grousing isn't going to help. What will help is the usual market cycle where this year's dog becomes next year's darling. Well, maybe the car makers won't become the market's darlings. I'd settle for the respect due a grandmother at this point.
It's always painful to watch the Foolish Four stocks flounder in the early part of their stay in our portfolio. It does try one's commitment to the strategy. But our out-of-favor companies don't suddenly spring back into favor just because they show up on our list. It takes one or two years on average, sometimes times longer. Sometimes they never spring back because this isn't a perfect strategy.
When I get discouraged, it helps to look at our Statistics Center, especially at the Foolish Four History page where you can trace the returns of every stock that qualified for the Foolish Four since 1961. (It helps to start at the bottom of the page and work your way up.) You can see stocks that were losers their first year that came back strong in the second or third year. You can also see stocks that never came back, but it didn't matter because the average return for the portfolio still beat the market.
In Performance History of the Foolish Four, you can see stretches where the Foolish Four lost to the market or barely beat it for five years in a row. The '60s were especially bad, back during the first technology craze. That craze ended in the recession of 1973-74. The Foolish Four beat the S&P by 78 percentage points during that two-year stretch, -41% to +37%.
Fool on and prosper!
I feel better now.