Stock Analysis

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The overall price performance of General Motors (GM) suggests that it is a cyclical stock with the firm's EPS and stock price linked to the general economy. The firm's stock price has experienced significant variations in the past five years, reaching a high of approximately $90 a share in March of 2000 to its current level of approximately $35 a share. During this period, the stock has also moved from a position of outperforming the S&P 500 to a position of matching and even slightly under performing the S&P 500. Based on the assumption that the S%P 500 reflects the overall trend of the economy, the comparison of GM's price with the S&P 500 indicates that the firm tends to follow the pattern established by the general economy over the long term. In the short term, however, the firm's stock price has temporarily outperformed the S%P 500 on a number of occasions based on investor perceptions of the future earnings of the firm.

GM's deteriorating stock price performance over the long term was largely driven by a dramatic decrease in earnings that occurred in 2001.

• In the late 1990s, earnings were steadily increasing, reaching a high of $6.68 a share in 2000. This helped to stimulate the steady upward movement in price between 1998 and 2000 when investors perceived that the upward trend in EPS would continue in the foreseeable future.
• In 2001, however, EPS fell to $1.77 a share, reversing an eight-year trend of steadily increasing earnings. This rapid and dramatic decrease in EPS stimulated investor selling, which resulted in a significant drop in GM price as investor expectations of future earnings growth diminished.
• In 2002, EPS recovered somewhat to $3.35 a share, but the recovery appears to have been insufficient to develop a high degree of favorable investor sentiment in the future prospects of the firm.