Former Blue Chip Could be a Great Stock to Own in 2017
Long gone are the days when pundits would say, “What’s good for General Motors is good for America.”
The phrase is actually a misquote of one of the automaker’s former CEOs, but it became commonly used to mean that General Motors (NYSE: GM) was a market bellwether.
Since GM’s restructuring after the financial crisis and temporary ownership by the government, it has reemerged as a new company… but not as a market bellwether. Yet that lack of attention may actually be where the opportunity lies.
GM is under much less analyst scrutiny with much less pressure to lead the market. And right now, the stock appears to be a diamond in the rough for investors with a longer time frame.
As anyone who is familiar with me knows, I focus solely on the technicals, but GM has some basic fundamentals even a technical analyst like myself considers compelling. After all, it isn’t often we find a stock with a trailing price-to-earnings (P/E) ratio under 4, a beefy 4.5% dividend yield and a chart sporting a technical breakout.
I’ll leave the rest of the fundamentals to others to ponder and focus on the trading action. Earlier this month, the stock broke through a solid overhead resistance level near $32.70 to get things rolling.
As we can see in the chart below, this level first became important in 2013 and 2014 as support. As is often the case, support became resistance, and in 2016, this level was even more important. So, when GM moved through it three weeks ago, we got a good signal that the trading range had turned into a rally.
The move was even more impressive because it began the day after the election with a gap down. Apparently, investors were a bit fearful about what would become of the auto industry under the new administration and its rhetoric of tariffs on companies moving their production offshore. Ford (NYSE: F) also gapped down at the open on Nov. 9.
But the next day GM shook it off and rallied sharply. It was almost a slingshot on the chart with a breakdown reversal turning into an upside breakout.
The gains were so sharp that a pullback was practically inevitable. The stock eased back down to kiss its former resistance zone before it stepped on the proverbial gas again last week. An outside-day reversal to the upside ended the correction, and the bulls took back control.
The stock is now trading above all its widely followed moving averages from the 20-day up to the 200-day. In fact, the only major hurdle left is the falling trendline drawn from the new GM’s all-time high of $41.85, set in December 2013.
Last week, the stock bumped into that line, currently around $34.50, so a move through it would be a good signal to buy. Waiting will prevent a drawdown should GM have one more stutter step before punching through the line.
Another reason to let the market pull us into the trade — rather than anticipating a breakout — is that there’s also chart resistance in this area from several former support points in 2015.
Although I expect the breakout to occur soon, be forewarned that GM is expected to go ex-dividend on Dec. 5, which could cause a temporary pullback.
If and when we get that breakout, though, I can see GM reaching a new all-time high based on a pair of upside projections.
First, the 2013-2016 decline formed a large trend channel. Its height from lower to upper border projected up from the presumed breakout gives us a target near $44 — more than 25% above the current price.
In addition, the 2016 trading range projected up from the $32.70 breakout level gives us a first target near $38 and a second target just below $44. I have found over many years of observation that these measured targets come in integral multiples.
The stop would be a drop just below the $32.70 level, which would negate the original breakout.
Again, this is a long-term trade that will pay us nicely with its dividend along the way.
Recommended Trade Setup:
— Buy GM at $34.50
— Set stop-loss at $32.50
— Set initial price target at $44 for a potential 27% gain in one year, plus dividends
Note: If you’re ready to take your trading to the next level, there are two ways you can enhance this trade. The first could bring in enough income to potentially double the stock’s already generous yield (find out how here). The second could leverage a much smaller move in the stock into double- or even triple-digit profits in a much shorter time frame (find out how here).