Event: GM reports Q3 earnings on Thursday, Oct 23rd, before the open The options market is implying about a 3.75% one day move, which is above both the 4 qtr avg move of 2%, and the 8 qtr avg of about 3%.
Sentiment: Wall Street analysts are relatively neutral on GM, with 14 buys, 7 holds, and 4 sells, though they have a high average 12 month price target of around $41.50. The stock has been a dismal performer in 2014, down 25% year-to-date, and at an 18 month low last week. Short interest remains subdued at around 3% of the float.
Price Action / Technicals: GM has been in a downtrend ever since it hit a new post-IPO high in December:
The stock’s critical level is around $30, which was breached for the first time since the spring of 2013 last week. However, the stock ended up closing the week above $30, and that’s the spot to watch after earnings.
On the upside, the first level to watch is $32, which was support on a couple occasions earlier this year:
Regardless, GM has a lot of upside supply given the trading that occurred between $32 and $36 in 2014.
Volatility: 30 day implied volatility hit a 2 year high in GM last week::
Implied volatility has fallen back to the 30 level, but this chart is enough evidence that GM implied volatility is more likely to move with the broader market than simply due to earnings this week.
Our View: GM has looked cheap fundamentally on a P/E basis for several years, but the stock’s performance has been weak nonetheless. The problem is that analyst estimates for GM are perpetually optimistic, despite the cyclical nature of GM’s business. As a result, investors are not willing to place a high multiple on GM stock. The real question in investing in GM is whether you think earnings will grow or contract going forward. That’s a much tougher question to answer than whether the stock looks cheap on valuation.