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Why General Motors Gets My Motor Running

Many investors are focusing on housing right now as a sign of recovery. But don’t overlook the importance of the auto sector as an indicator of economic growth.

Historically, Detroit automakers Chrysler, General Motors (NYSE:GM) and Ford (NYSE:F) have been big bellwethers of the U.S. economy — both as indicators of manufacturing employment and as a proxy for consumer spending.

And say what you want about “Government Motors” and the bailouts, but Detroit is firing on all cylinders again and car sales continue to rise.

Here’s why:

A U.S. Rebound in Sales: Consider that although revenue isn’t back to mid-2000s peaks, GM did post a record profit just two years after declaring bankruptcy. Furthermore, 2012 U.S. light-vehicle sales hit 14.5 million vehicles — the highest level since the Great Recession, and a sign that consumers are willing to spend again on bigger-ticket items. Continued growth is expected this year, with research and consulting firm Polk expecting auto sales to hit 15.3 million vehicles in 2013.

A Rebound in Margins: I recently wrote in great detail about the return of truck sales thanks to a housing recovery, and what that means for margins. Naturally, the biggest winners here will be the companies with the biggest truck brands domestically — Ford and GM. Furthermore, a resurgent U.S. economy could boost luxury vehicle sales at brands like Cadillac and Lincoln.

Nowhere But Up in Europe: Automakers have been brutalized by the European recession as vehicle sales there have plummeted. Consider that new car registrations just fell to the lowest level in the history (at least, back to 1990 when record-keeping began). But the good news is that automakers have adjusted expectations and manufacturing in Europe as a result. And if they can still crank out profits in this environment, imagine where they will be when Europe turns around in a year or two.

Japanese Stocks on the Outs: Of course, these trends will lift all automakers. However, Japanese stocks Honda (NYSE:HMC) and Toyota (NYSE:TM) continue to see trouble abroad thanks to tensions with China. Consider Toyota sales in the country are off 13% so far in 2013 based on diplomatic dust-ups and negativity among Chinese consumers.

Why I Like GM Stock Best

Of all the automakers, I like General Motors the most.

For starters, the Treasury Department sold a roughly $490 million stake in the company in February and continues to wind down its position. That can only be good for GM stock as it gets back to normal operation without government oversight.

Secondly, the valuation is amazing. Fiscal 2014 earnings per share are forecast to be $4.35. At around $28 a share, that’s a price-to-earnings ratio of around 6.5! Imagine if a consumer recovery in Europe or America is brisk and those expectations are beaten. And even on trailing earnings, GM has a single-digit P/E.

For long-term investors, the dividend hopes are another good reason to buy GM now. Obviously, General Motors hasn’t been able to dish out the cash as it is paying back Uncle Sam. But keep in mind that in January it paid about 60 cents a share on a quarterly dividend for its preferred stock and could start delivering that cash to common shareholders in the future once the bailout is wholly wound down. A mere 20% dividend payout ratio based on FY2014 earnings would be 87 cents a share for a 3% yield.

Last but not least, sentiment remains pretty negative on GM thanks to the bankruptcy and the flop after its late 2010 IPO. Shares peaked at $39 after a few weeks, then crashed as low as $20. The company hasn’t seen its stock push $30 for more than a few trading sessions in almost two years. Pair that with the bankruptcy and the “Government Motors” label — along with the current lack of dividend and lack of revenue growth — and you can understand why investors don’t like this pick.

But I remain convinced that improving global outlooks will lift sales, bigger margins will lift profits and less government oversight will result in growth and a reinstated dividend in the next year or two.

That means now is the time to buy GM.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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