How are professional investors playing the new GM?
Was General Motors (NYSE:GM) floated at a fair price we ask ourselves? We have all read the official verdict as summarized in last week’s Financial Times, “The IPOs success has been widely interpreted as evidence of investor confidence that GM is a transformed company….” However, the price has not taken off as some expected so attention will turn to the short sellers since, as we know from the academic research, when you let both positive and negative opinions to be expressed prices reflect all information in the most efficient manner. A reading of the latest securities lending flow data tells us that short sellers have sprung to life here although it is premature and wrong to assume that they all think GM is overvalued. With no public data yet available it is especially useful to bring stock lending data to light.
GM returned to the public equity market at $33 after the underwriters – Morgan Stanley and JPMorgan – raised the initial price range. These banks had a tough job – on the one hand they had to appease GM’s largest shareholder, the US taxpayer, by floating at the highest possible price while on the other to convince investors that GM was worth their valuation. Given how oversubscribed it was some were surprised the price only rose to $35.99 before retreating back to mid $33. That said, at the price on the 26th November, this places a total value on GM of $50.7bn with a free float (i.e publicly traded) value of $15.7bn. Not bad for a company that went into administration as recently as early 2009.
We estimate that as of the close of business on Friday 26th November, 45.72m of GM’s NYSE listed shares were borrowed which is 3.05% of the full float and 10.21% of the free float based on Bloomberg’s free float shares in issue figure of 447.96m. The lion’s share of these loans are originating from Custodians or equivalent lenders with over half of their supply borrowed.
Is any of this directionally motivated – unlikely. The new convertible Preference share is “out of the money” so would not engender very much short selling but there are still many legacy GM bonds around from years ago that distressed debt investors may well be interested in hedging with a new instrument (aka the new GM equity).
A third line of GM was also issued – a Canadian listing under the ticker GMM – but none of this is so far available to borrow and being loaned by any Custodians. This is odd given that Canadian pension plans are active lenders. There is a chance that this stock has been taken up later by the Canadian mutual funds for whatever reason.
Securities lending data can be used to verify GM’s claim that “almost every big US mutual fund had applied for shares, leaving them as the car maker’s biggest new shareholder.” (FT) Given that most of these funds engage in securities lending with their shares, we can look at this data for a proxy as to whether this is the case prior to public filings. It does look to be reasonably accurate since 16.6% of GM’s equity free float sits with these funds. A free float market cap of $15bn is similar to names like Heinz, Charles Schwab and Waste Management. These three see 19%, 22% and 28% of their free floats sitting with funds who lend in contrast to the 16% with GM. Given how recently they floated this is a very quick and strong take up by mutual funds.
As GM is not yet part of the major indices, this is also a promising take up given the funds who replicate an index do not need to buy until GM joins the S&P500 as it is likely to do in mid December. For now, there is enough supply to meet the demand by roughly 2:1. However, if GM’s fortunes wane before it joins the S&P there could be some pressure to find supply for those wanting or needing to short sell this iconic American name.
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