GM September 2009 $1.00 puts GMUV
June 02, 2009 - 1:38am EST by
ladera838
2009 2010
Price: 0.72 EPS N/A N/A
Shares Out. (in M): 0 P/E N/A N/A
Market Cap (in $M): 0 P/FCF N/A N/A
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT N/A N/A

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Description

 

I recommend the purchase of GM September 2009 puts with an exercise price of $1.00, which closed Monday at $0.71 (bid) / $0.72 (ask).  My belief is that these puts will be trading at $0.90 to $0.95 within days, and will eventually be worth $1.00 upon expiration on 9/19/09, or in less than four months, for a gain of almost 40%.

 

It is virtually certain that GM's stock is worthless.  Yet it closed Monday at $0.75, unchanged from Friday's close, despite GM's bankruptcy filing Monday morning.  Why?  I can think of three possible reasons:

 

(1)   The company has not explicitly stated that shareholders are to be wiped out in the reorganization.  I expect this to shortly be rectified; more on this below.

(2)   Short-covering by investors who sold at higher prices.  (The stock is down by more than 75% this year, and 95% over the last twelve months).

(3)   Possible buying by retail investors today, with the argument: "It's only 75 cents; how much can I lose?"  (Answer: 100%)

 

The good news is that there are two catalysts that are likely to send the stock down sharply within days.  I discuss these catalysts below.

 

Let me acknowledge here the VIC write-up by nha855 on April 27th, which recommended selling GM January 2011 $2.50 calls, when the stock was trading at just over $2.00.  His thesis, which was absolutely accurate, was that the stock was worth no more than $0.25.  At that time, shareholders were being offered 1% of the stock in the proposed reorganization, if the stakeholders agreed to the proposal without a bankruptcy filing.  Now that the company has filed, shareholders will get nothing.  In my view, my recommendation to buy puts is the most capital-efficient and risk-efficient way to play the current situation.

 

Why do I believe that GM's stock is worthless?

 

(1) According to the 8-K filed by GM on May 28th, stock in the new GM (post-bankruptcy) will be allocated as follows:

(a)    72.5% to the U.S. Treasury and the governments of Canada and Ontario.

(b)    17.5% to the Voluntary Employee Beneficiary Association (i.e. to the unions for employee benefits).

(c)    10% to bondholders.

Note that this adds up to exactly 100%, and there is no mention of current shareholders receiving any stock in GM upon its emergence from bankruptcy.

 

(2) With the company having filed Chapter 11, it is hard to imagine shareholders being given anything by the bankruptcy court, versus the 1% of the company they would have received under the earlier proposal, if bankruptcy had been avoided.

 

(3) In his speech Monday morning on the GM bankruptcy filing, President Obama made a brief reference to the fate of shareholders.  Referring to the restructuring, he said: "It will require GM shareholders to give up the remaining value of their shares - just as they would have had to do in any private restructuring of this kind."  It is the most direct statement I have seen to date from any of the parties regarding the outcome for shareholders.

 

(4) For what it's worth, New York Times columnist Floyd Norris agrees that the shares are worth zero.  See link below:

http://norris.blogs.nytimes.com/2009/06/01/how-can-worthless-shares-be-valuable-do-not-post/?scp=4&sq=floyd%20norris%20gm&st=cse

 

 

Catalysts

 

There are two short-term catalysts that I believe will serve to drive the stock down sharply over the next few days:

 

(1)   GM management is holding a conference call at 9:30 AM New York time on Tuesday to discuss the bankruptcy filing.  If, as I expect, it is made clear that shareholders are to be wiped out in the reorganization, the stock will likely decline rapidly on Tuesday and over the coming days.

 

(2)   Having filed for bankruptcy, the stock will shortly stop trading on the NYSE, and will instead trade OTC.  This is likely to drive the stock down further.

 

There are, of course, other ways to play the situation, though I consider the puts the best way to go in terms of capital invested and risk involved.  Depending on your risk tolerance, you could choose puts with other expiration dates and/or exercise prices.  Or you could sell the stock short, if it is borrowable (I haven't investigated this option, because I worry about the risks of a short squeeze or a buy-in).  Finally, you could sell calls, as recommended by nha855.  Again, this option seems less attractive to me today than buying the puts.

 

Catalyst

(1) Tuesday 9:30 am conference call.

(2) Delisting from NYSE.

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