General Motors and Credit Acceptance: Dump 'em

Dear Mr. Berko:

I own 300 shares of General Motors, and I bought them last December. I considered buying another 300 to reduce my basis. My broker wants me to sell the stock.

I'd like to buy 100 shares of Credit Acceptance Corporation, but my broker doesn't like the idea. He told me to hold off on buying anything until the first quarter of 2012 because he believes the market and economy are weak. He advised me to keep cash in my money market account.

He'll be getting out of the business and will soon be teaching high school because he can't make enough money selling stocks and bonds. I hate to lose him because he has always been honest with me and I trust him.

LD, Syracuse, N.Y.

Dear LD:

Credit Acceptance Corporation (CACC-$78) does auto loans for deadbeats, bums, drunks, felons, the unemployed and stupids who let auto dealers finance their car purchases. The loans are risky, the interest charges are in the double digits and the late-pay penalties would embarrass even Bank of America. And, of course, CACC is enormously profitable.

CACC makes big bucks by offering independent dealers and franchise dealers two programs: 1) A portfolio program that advances money to dealer-partners for the right to service (with enormous fees) underlying customer loans, and 2) a purchase program in which CACC buys loans from its dealer-partners and keeps the amount it collects from each customer. These CACC guys are really good at collecting and can even make gang bangers cry in their Menudo.

This moneymaking company posted trailing 12-month revenues of $407 million, net income of $177 million and earnings per share of $6.42 on 26 million outstanding shares. During the past year, CACC reported net profit margins of 43 percent and a return on equity of 34 percent. These guys really know their shinola. And as long as interest rates remain low and as long as auto sales remain brisk, CACC will continue to enjoy the Midas touch.

The earnings consensus for 2012 is between $8.05 and $7.16 on an expected 11 percent increase in revenues, plus a 12-month target price of $90 to $95. And while Wall Street is mildly bullish of CACC, I don't share that optimism. CACC's revenues and earnings are dependent on auto sales, and if the U.S. segues into a double-dip recession (some say it's here now), CACC's numbers will lose their octane.

I've been telling readers to sell their General Motors stock ever since it went public at $33 last November. The new General Motors (GM-$24) is basically the same wine in the same bottle -- with a new label and a synthetic cork. Meanwhile, GM's management (those at Ford and Chrysler too) are hiring new workers, opening shuttered plants and expanding production capacity in anticipation of higher auto sales in 2012 and 2013.

Perhaps management at GM, Ford, and Chrysler are taking stupid pills.

Unemployment in 2012 may easily increase; consumer income and consumer confidence is falling; and taxes are rising, as are the costs of homeowner's and health insurance. The European economy is running on a broken leg; Greece's goose has been cooked; Italy may become another Greece; and some of Europe's big banks are drastically undercapitalized.

But the lads who run GM, Ford, and Chrysler figure if they're too big to fail, they may also be immune to a world recession. Some assume that GM and Ford are expanding and hiring into a bad business environment as payback to the government and the unions for saving their old business model.

In short, don't buy CACC, and sell your GM as quick as a bunny.

I like your broker. I admire his honesty and his clear-headed thinking. Unfortunately, his candid opinions will not serve him well in this business, where complete disclosure and truth adversely affect his commission income. I think he may make an excellent teacher, and his students will be very fortunate to have him.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Wed, Nov 23, 2011

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