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GM’s stock: Cheap, or a sucker’s bet?

DETROIT -- Investors in General Motors probably feel like it’s time for a Santa Claus rally.

GM’s stock sat at $20.70 at Thursday’s close, about 39 percent below the price of its November 2010 initial public offering.

Its market capitalization of $32.4 billion roughly matches its cash reserves.

Thirteen of the 18 Wall Street analysts who cover GM recommend buying the shares.

Those factors all point to a cheap stock with upside. But one of those analysts says it could be a “value trap.”

Investors intrigued by GM’s beaten-up stock price should carefully weigh a few key risks that still hang over the automaker, J.P. Morgan analyst Adam Jonas wrote in a note to investors last week. (It’s a bit of a devil’s advocate take: Jonas still recommends buying GM shares because of their potential to soar.)

The risks include:

  • GM is leaning heavily on North America and China for its profits while losing money in South America and Europe, where GM is facing more restructuring costs.
  • The disappointing fourth-quarter profit forecast that GM issued last month suggests that the automaker’s profitability remains somewhat volatile and unpredictable (though, to be fair, that’s mostly because of the fluid situation in Europe).
  • GM’s profit margins could be pressured by higher vehicle-launch costs next year, and pricing could cool after this year’s big gains.

GM’s profitability and share price next year hinge largely on two points: whether U.S. light-vehicle sales hit at least 13 million units and whether the European debt crisis is defused, Jonas says.

The first point looks favorable for GM. U.S. sales in 2012 are forecast at 13 million to 14 million, according to 11 independent analysts. That would be up from estimated 2011 sales of about 12.7 million or slightly more.

Resolution of the European debt problem is more iffy.

Jonas sums up the risks this way:

“GM remains our top pick in U.S. autos because of a risk/reward we believe is asymmetrically skewed to the upside,” he writes. “But the road ahead in 2012 will remain bumpy.”

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