November 24, 2021

This week’s Update is being published on Wednesday due to the Thanksgiving holiday in the United States. The December edition of the Cabot Turnaround Letter will be published next Wednesday, December 1.

There were no earnings reports this past week. The last company to report is Duluth Holdings (DLTH), scheduled for December 2.

Ratings changes:
General Motors (GM) – moving from Buy to Sell. General Motors has made a remarkable transition from bankruptcy in 2009 to a highly-profitable and innovative contender in the rapidly changing global auto industry, driven by CEO Mary Barra. However, with the shares at about $62, we think the risk/reward trade-off has moved into unfavorable territory, and are thus moving the shares to Sell.

The potential upside comes from GM transitioning to an electric vehicle world, eventually offering a wide array of luxury and mass-market EVs, along with related services that could be highly profitable. GM’s Ultium battery segment could, theoretically, become a major competitive advantage. In an ideal case, if GM can create a cost-effective and long-range battery when others can’t, GM could have a monopoly on the primary component of EVs, and thus have a huge profit and volume advantage.

But potential downside comes from many sources. Battery technology is being developed by many well-capitalized companies and it’s unlikely that any breakthrough or edge will be enduring. Ultimately, we see batteries degenerating into a low-margin, capital-intensive business. We also see the expansion of EV cars into the mid-priced mainstream segment as being many years away – especially as nearly all of the EVs today are high-end vehicles costing at least $60,000. The future profitability of EVs isn’t clear: High margins for today’s EVs primarily come from their luxury appointments which don’t cost much to produce but add an immense amount of profits – strip out these luxuries and the price per vehicles falls sharply but the costs don’t. This could crimp margins on EVs.

We see the sum-of-the-parts valuation of GMs EV and other advanced technologies using peers like Tesla, Rivian, Lucid and others as not very meaningful – GM will not spin-off its EV or other operations to unlock this comparison. Also, we believe that GM’s investor base is very different from its pure-play speculative competitors’ investor base, such that GM shares won’t capture the (elevated) valuations of its peers.

Other risks include the cyclicality of the auto business – and we’re near the top of the cycle now. A remote but non-zero risk is that relations with China deteriorate further such that the Chinese market becomes sharply less-attractive to GM, removing a major source of profits.

Perhaps the lynch-pin of the deterioration in the risk/return trade-off is GMs elevated capital spending. With the price of EV failure so high, we believe GM will not take its foot off the capital spending pedal. We see this permanently elevated spending siphoning off much of the company’s free cash flow indefinitely.

With this Sell, GM has produced about a 120% total return since our long-ago initial recommendation.

Friday, November 24, 2021 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.

Today’s podcast is about 7 minutes and covers:

• Ratings change:
  
  • General Motors (GM) – moving from Buy to Sell as risk-reward becomes unfavorable.

• Comments on other recommended companies:
  
  • Walgreens Boots Alliance (WBA) – grand jury finds liability in opioid crisis.
  • Vodafone (VOD) – competitor Telecom Italia receives a buyout offer.
  • Macy’s (M) – shares lose their post-earnings surge, we are sticking with the name.

• Final note:
  
  • Our “unbiased” view on the Ohio State-Michigan game this weekend.

Please feel free to share your ideas and suggestions for the podcast with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.