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Don't Buy the Hype, or GM

Once again public, the streamlined auto giant still faces roadblocks.

Now that all the hoopla surrounding the initial public offering of the new General Motors (symbol GM) has receded, we can address the investing merits of this icon of American industry in a calm environment. Our verdict: Wait for the price to come down.

We say that even though the stock, at $35 in early December, hasn't had a huge pop since going public at $33 on November 18. And we're aware that some investors are bullish on auto stocks because they think the industry is at the bottom of the cycle. Sales in the U.S. hit a 27-year low of 10.4 million vehicles in 2009. Forecasters expected sales of 11.5 million vehicles in 2010 -- still a far cry from average annual sales of nearly 17 million from 1999 through 2006. From such depressed levels, sales have nowhere to go but up, the bulls say.

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But even after GM reduced its head count by tens of thousands of workers and shed billions of dollars in liabilities as part of the U.S. government's bailout, the company still has worrisome issues. First, GM is run by an untested team of managers who must still report to government bureaucrats. After the IPO, the Treasury's stake fell from 63% to 27%, somewhat diminishing the taint of Uncle Sam owning a major stake in "Government Motors." But even after the IPO, the sellers -- the Treasury, the Canadian government and the United Auto Workers pension fund -- together own about half of the company.

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Another problem: GM conserved cash during the crisis by holding back on new-product development, says Jeremy Anwyl, chief executive of Edmunds.com, the auto-information Web site. A shortage of new products, he says, might lead to an oversupply of older models that could require large discounts to sell. That could threaten profit margins.

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The good news is that GM is now solidly in the black. Plus, experts say, GM makes better cars than it did five years ago, although the company still needs to overcome a legacy of producing gas-guzzlers with quality problems. Fuel efficiency has improved by about 25%, says analyst David Silver, of Wall Street Strategies, an independent research firm. GM is making a big push for the Chevrolet Volt, its new entry into the electric-vehicle market (see Drive Time).

As the largest foreign automaker in the world's largest car market, some bulls say GM is a China play. But it's difficult for GM to raise prices in China, so the profit per vehicle is small compared with the profit per vehicle sold in North America. Meanwhile, GM's European operations remain unprofitable.

GM was allowed to keep its huge, $45-billion tax-loss carryforward, which means it won't be paying taxes for a long time. Although that will enable GM to build its cash position, none of the money will be going to shareholders as dividends. Instead, a lot of the cash it earns will end up in the UAW pension fund. GM is "a cash register for the UAW," says Francis Gaskins, president of IPOdesktop.com, a Los Angeles research firm.

Of course, if these issues don't bother you and if GM's share price drops below its offering price, as happened with many other companies that went public in 2010, you might want to take a second look. "Down the road, if the hype leaves the market and the stock comes down in price, that is when retail investors should take their first dip," says Silver.

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