With all of the negative sentiment surrounding General Motors and their impending bankruptcy, many people are wondering if a good play would be to buy General Motors Stock right now. Unfortunately, they couldn’t be further from the truth!
While many contrarian investors would claim that right now is the perfect time to buy stock in General Motors due to it being knocked down so much by fuel prices, the economy, and the Obama administration, their view is rather short-sighted. True contrarian investing focuses on finding otherwise strong stocks that have been dragged down by short-term issues. With the General, what we’re seeing right now with its stock price is a culmination of decades of mismanagement and cost issues just finally coming to the forefront.
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The main reason why the Obama administration is failing to support General Motors and consequently GM stock, is because they know the issues that GM faces will not be solved by even tens of billions of dollars more of bailout money. Its a sad fact that General Motors just cannot compete long-term with the likes of Honda and Toyota on quality or cost without some serious structural shake-ups. The Obama administration does not want to see General Motors fail or see its stock go to zero, but reality dictates that the government (eg. the taxpayer) shouldn’t continually pay for a corporation’s inefficiency.
Does this spell the end for General Motors? Most likely not, but what it does mean is that GM will go through a painful restructuring process that may or may not involve bankruptcy filings. If this does happen, then most certainly General Motors stock will go to nearly zero. However, even without a specific Chapter 11 filing, General Motors is still heavily in debt and will see to paying off its debtholders long before its shareholders. Either of these scenarios are going to keep a cap on General Motors stock price for a long, long time to come.
Read more about the decades-long buildup which is currently affecting
Even with General Motors far from recovery, there is hope in this market! Not all stocks went into this recent downturn suffering from the huge debt and inventory load that GM did. In fact, many stocks were well prepared with cash on hand and solid business practices which will enable them to rally hard when this market turns.
