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Peter Lynch

GM
1992-1993
Industry: Cars
Category: Cyclical

Context

Why the Company is Mispriced
GM lost it's #1 spot to Japanese automakers.
GM was considered arrogant, myopic, resting on its laurels, but besides that, it was in great shape.
People thought GM as a weak company with a miserable future.

Alternative View
The car stocks are not blue chips, they are actually cyclical.
We all have to replace our cars eventually, but people delay their purchase in poor economies to save money.
There are 2 ways to check the cycle.
(1) Used car prices. If they are low, it's because people aren't buying cars.
(2) New Unit sales. Number of sales below the trend creates pent-up demand. This demand can accumulate over time in poor economies.
Lynch saw that there was a fair bit of pent-up demand from the 1991 recession, and that people hated GM stock at the time, so he was attracted to the company.
GM not only had US operations, but European, a financing arm, Hughes Aircraft, Delco, and EDS.
If the company can breakeven on US operations, GM would earn $6-8/sh in 1993.
Giving a PE of 8, the stock should sell for $48-64/sh, a significant advance over the current price of $32.50/sh.
If GM's auto business improves beyond breakeven, Lynch estimates that GM could earn $10/sh.

Result
From 1992 to 1993, GM shares grew 87%, which is a 37% CAGR.