By Eric Manson
General Motors (NYSE:GM) has come a long way since its bailout during the 2008 recession, but industry based modeling shows the largest difference in modeled price versus observed price, since then.
As the above chart shows, General Motors is out of sync with a model that has not only shown to be accurate over the course of GM’s stock history, but has consistently represented the mark General Motors’ share price returns to. This analysis shows an emphatic indication to sell.
The modeling approach is a multivariate regression that uses 6,692 data points to form 1,672 observations, over the course of almost 7 years. The model has a Significance F value of 0, which indicates a likelihood of this modeling just being chance is 0%; additionally, every variable in the model caries a statistically significant relationship to GM’s share price (P-value <.0001). The results were indexed to a base value of 100, in order to better frame the results.
The independent variables in the model are Ford Motor Company (NYSE: F), Fiat Chrysler Automobiles N.V. (NYSE: FCAU), and Toyota Motor Corporation (NYSE: TM). The rationale for these three independent inputs came from a series of regressive model testing to ensure the most accurate result. For example, a model was conducted with Honda Motor Co., Ltd (NYSE: HMC), but the resulting model was considerably weaker than the one being displayed. The dependent and independent variables were combined to form the data series in the graph titled (Car Industry Indicator), consisting of: General Motors, Ford Motor Company, Fiat Chrysler Automobiles N.V., and Toyota Motor Corporation.
General Motors has not seen a correction from around the last quarter of 2015, which is part of the reason a sell stance is preferred to a hold.
As the above chart shows, the model, over the timeframe of the investigation, is exceptionally accurate in its ability to represent the value of General Motors. The econometric indicator that shows the actionable move for General Motors is sell is clearly demonstrated in this data set.
General Motors is diverging from the model, over the last 60 days, at over 15%, but the affirmative information comes from the standard deviation. While the mean difference is certainly indicative of a large overvaluation, the standard deviation paints the picture of a sustained overvaluation far beyond the reasonable margin of error. In fact, the comparatively small standard deviation of the last 60 days may be signaling a potential correction soon. Though, it is hard to determined when the price will drop because this is the longest period of misvaluation in the history of the model.
Furthermore, the small standard deviation and the large divergence to the model statistically suggests that the overvaluation has plateaued. The flattening off of the overvaluation is indicative of a climate before a sudden price correction. This is why General Motors should be considered prime for a sell position or a short.
The graph also depicts an important aspect of the model, and that is rigidity. Projected share value of General Motors is the consistent point to where the observed share value returns to. Unlike certain modeling expeditions which may generate a strong correlation with a statically significant relations, but offers just a shadow of the share price that moves to the observed share price as often as the observe moves to it, this model expresses the equilibrium of General Motors.
When referencing a stock’s equilibrium, this is referring to the inherent position of where the supply of the stock matches the demand for the stock. This is an important relationship because it helps convey, in the short run, what is the appropriate stance to take on the stock.
The model presents a mean overvaluation of 20.43%, which is far beyond the margin of era for the regression. To continue down that track, an expanded distribution analysis of the returned variable coefficients revealed an interesting conclusion among the predicted value of the model; consensus.
The above chart shows the model isolating each coefficient at either plus two, or minus two, standard deviations of its mean. In short this graph shows the possible range in which the share price of General Motors should fall 95% of the time.
Going off this scenario analysis it is clear to see that General Motors is not within the upper bounds of a modeled area of projection, but firmly in the overvaluation area. This should give confidence to any investor who are weary, and rightfully so, of models whose means show misvaluations, but often have distribution ranges that would show a stock’s value to be within an acceptable variation.
In conclusion, the empirical evidence shows that General Motors is overvalued. Statistically significant econometric modelling narrates a convincing portrayal of a stock whose value has been in a prolonged bubble and is plateauing. It should be expected that General Motors will experience a correction that will result in a dramatic reduction in share value.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was written by a third party.