In Friday’s trading session, GM stock (GM) closed at $35.57, rising 2.63% from the previous session. This change in General Motors lagged behind the S&P 500’s 1.09% increase for the day. Moreover, the Dow Jones gained 1.21% while the Nasdaq surged 1.34%.
Over the past few days, there have been several bullish bets placed on GM stock, suggesting that it could climb higher in the coming weeks and months. Let’s take a closer look at GM’s valuation and options activity to see if GM is a solid choice for investors at the current levels.
GM stock: Third-quarter expectations and valuation
The company is scheduled to report its earnings for the third quarter of 2019 before the market opens on October 29. Currently, Wall Street expects GM’s earnings to grow 28.58% in the third quarter to $1.61 per share. Following this trend, analysts forecast that GM’s Q3 revenue could rise to $36.19 billion. This estimate implies a rise of 1.12% on a year-over-year basis. Moreover, analysts expect the company’s EPS at $6.36 in 2019 and $6.49 in 2020, which implies respective increases of 0.68% and 2.06% year-over-year.
GM stock is trading at 5.59x its fiscal 2019 earnings estimates of $6.36. General Motors looks undervalued compared to the sector’s median forward PE ratio of 16.49x. GM stock’s P/E has been as high as 62.21 and as low as 3.52x, with a median of 7.45x. The stock’s P/E multiple could go back to its historical median levels of about 7x. If this happened, the shares could climb to around $44.5—a gain of 25% from the current levels.
GM options analysis
The implied volatility for the options, at a $36.00 strike price that expires on November 15, stands at 35.06%. This number means investors expect an event that could cause moderate movement in one direction or the other.
Looking at the November 15 options, I see a bid/ask for the $36.00 call option of $1.28/$1.31. Also, I see a bid/ask for the $36.00 put option of $1.57/$1.62. Keep in mind that the options strike closest to the previous GM closing price of $35.57. We can calculate the expected price move using the mid-prices of these options:
1.595 (36.00 Put) + 1.295 (36.00 Call) = 2.89/35.57 = 8.12%
As you can see, the options imply that GM stock could rise or fall by ~8% by the November expirations from the $36.00 strike price using the long straddle strategy. This assessment would place the stock in a trading range of $32.6–$38.3 by the expiration date. Moreover, the calls at the $36.00 strike price outweigh the put options about 11:1 with 7,933 open calls to 745 open puts.
Additionally, the calls at the $38.00 strike price outweigh the put options about 30 to 1 with 8,802 open calls to just 321 open puts. It’s a large, bullish bet as the open interest represents a total dollar value of about $475,000. A buyer of the $38 strike price calls would need the stock to rise to around $38.54 by the expiration date.
Bullish options bets for GM stock
The open interest levels for the November 15 $36.00 calls increased significantly on Friday, October 11. According to barchart.com, the open contracts rose by 6,562 contracts to about 7,933. A buyer of the calls would need the stock rise to $37.27 by the expiration date, a gain of about 5% from GM stock’s current price.
Also, the options—which expire in November 15—saw increased call buying over the past week. The open interest for the $38.00 calls rose by 5,077 contracts to a total of 8,802 open contracts (source: barchart.com). A buyer of those calls would need the stock rise to $38.64 by the expiration date, a gain of about 9% from GM stock’s current price.
Analysts’ coverage and target price
Quite a few Wall Street analysts have upgraded GM stock over the last six months. The consensus price target stands at $47.33, which represents a 33.07% upside. See MarketBeat for a detailed breakdown. According to TipRanks, GM is a “moderate buy” with an average price target of $ $46.40, representing 31.01% upside.
To learn more about what’s driving GM stock, check out GM Strike Negotiations in ‘Home Stretch’? Banks Weigh In.