GM near bankruptcy? Buy auto stocks?!

GM's stock has plunged this year. But shares of Ford and Japanese are enjoying a nice rebound. What's driving the auto optimism?

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By Paul R. La Monica, CNNMoney.com editor at large

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Shares of Ford have surged this year even as GM's stock has plunged on bankruptcy fears.
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Sales have fallen sharply for Japanese atuomarkers Toyota, Honda and Nissan this year. But their stocks haven't.

NEW YORK (CNNMoney.com) -- General Motors' stock price has been stuck in reverse as investors seem to be betting that bankruptcy is inevitable.

Through Friday, shares of GM (GM, Fortune 500) were down 36% this year. The stock fell another 16% Monday afternoon after new reports that the government is pushing hard for bankruptcy.

A GM bankruptcy could cause tremendous upheaval in an already troubled industry. But interestingly, investors are treating the likelihood of a GM bankruptcy as an excuse to scoop up the stocks of many of its top rivals.

(Privately held Chrysler LLC has until May 1 to work out a partnership with Italy's Fiat or it could also enter bankruptcy.)

Shares of Ford Motor (F, Fortune 500), the only member of Detroit's Big Three that is not in imminent bankruptcy danger, are up 85% this year. The stock was even up Monday afternoon.

Shares of the top Japanese automakers listed in the United States have also performed surprisingly well: Toyota Motor's (TM) stock is up more than 20% while shares of Honda Motor (HMC) and Nissan Motor (NSANY) are each up about 35%.

At first blush, it may seem that investors are making a mistake. With auto sales expected to continue to plummet for the next few months, it's hard to imagine why anybody would want to own an auto stock these days.

What's more, a GM bankruptcy or shutdown at Chrysler could lead to a wave of auto supplier shutdowns, something that has the potential to cause disruptions at the plants of Ford as well as foreign rivals.

But one investor in Toyota said that even if a GM or Chrysler bankruptcy does create more short-term headaches, Toyota still is likely to emerge as a long-term winner in the auto market.

"If you look past what's going on in the past picosecond, Toyota has been picking up market share in the U.S. since the 1960s," said Scott Black, president of Delphi Management, an investment firm in Boston. "Toyota has been building efficient autos for awhile. It is a well run company with a strong balance sheet that is going to survive."

Of course, this doesn't mean that Toyota or other auto manufacturers are going to enjoy a strong 2009. Toyota, which has already said it will report an operating loss for the fiscal year that ended in March, is expected to report another operating loss in fiscal 2010, according to analyst estimates from Thomson Reuters.

But an investor who owns shares of Toyota, Honda and Nissan said that sales for the Japanese automakers could get a near-term boost from a GM bankruptcy. Even though the U.S. government is backing warranties on new GM and Chrysler purchases, consumers may still worry about the risk of buying from them.

"It appears that GM will survive in some fashion. But a bankruptcy could further position the Japanese automakers in consumers' minds as safer plays if you are buying a new car," said Wendell Perkins, chief investment officer of Optique Capital Management in Milwaukee, Wisc. His firm owns all three Japanese automakers in the Optique International Value fund.

Where does this leave Ford? Ford has been able to hold up better than its fellow Big Three rivals thanks largely to the fortuitous decision in late 2006 to borrow $23 billion. That has enabled Ford to not need more cash at a time when lenders have essentially put a Club on the credit markets.

Nonetheless, Ford is still expected to lose about $8 billion in 2009, according to estimates from Thomson Reuters. That's one reason why my colleague Chris Isidore has dubbed Ford as merely "the healthiest patient in the ICU." And remember, though its stock is up big this year, it's still down about 40% from a year ago.

Jon Burnham, manager of the Burnham fund, said he recently sold his stake in Ford because he's concerned about continued weak sales. He added that the Asian automakers have another advantage over the Big Three in that they are offering more leases to consumers.

Burnham conceded that Ford's recent debt restructuring efforts and a deal to get more concessions from the United Auto Workers union are positive signs. But he's still concerned that the company is not as well-positioned as foreign rivals to withstand a prolonged sales slump.

"Ford has a great line of new cars coming out but the demand side of the picture is gone. That's really the problem," Burnham said. "Ford is probably financially ok for a year or so but maybe not beyond that if business remains bad."

However, based on the way shares of Ford and the top Japanese automakers have performed so far in 2009, some investors seem to be willing to gamble that auto sales may not be so bad for much longer.

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