01:00 AM EDT on Tuesday, May 31, 2005

General Motors Corp. of Detroit, the automotive giant, has hit a few potholes lately. Suppose you own GM stock. Should you hold or sell? That's the point a man from Warwick was driving at in a call to MoneyLine:

Q:

I am heavily invested in General Motors stock and also GMAC Smartnotes, an unsecured note. Can you please give an overview on what is happening with General Motors? . . .

J.R., Warwick

A: Prospects aren't bright at the moment for GM (NYSE: GM), the world's largest automaker.

The company has a stable of brands that are household names, including Chevrolet, Buick, Cadillac, Oldsmobile, Pontiac, Saturn, Hummer, Saab and Opel. GM also has a global financial services subsidiary, General Motors Acceptance Corporation (GMAC).

So what's wrong? The company has hit a rough patch, said Jordan E. Goodman, author of Everyone's Money Book on Stocks, Bonds, and Mutual Funds and editor of the Web site:

www.moneyanswers.com

"General Motors stock has been plunging over the last year because the company's main source of profit, its gas-guzzling SUVs, have not been selling very much as the price of gas has been soaring," said Goodman, the former Wall Street correspondent for Money magazine.

"GM's market share has been shriveling against competition from Asian and European automakers, which means they are losing billions of dollars," he said.

Morningstar, of Chicago, the influential publisher of information on mutual funds, stocks and other investments, calls GM "the poster child for the flaws of the auto industry."

In a recent report on GM, Morningstar said, "All of our cautions on this value-destroying industry seem to be magnified at the stumbling giant: huge fixed costs, strong unions, onerous regulation, intense competition and volatile demand."

In response to GM's weakened financial condition, the Standard & Poor's ratings agency recently lowered its credit rating on GM bonds to junk status, hurting the stock even more, Goodman said.

GM stock, which traded as high as $78 a share in May 2000, has lately been trading at around $31 a share.

The only positive news for GM stock lately was the unexpected interest in the company from billionaire investor Kirk Kerkorian, who in past years made a successful run at Chrysler, Goodman said.

Kerkorian's private investment company, Tracinda Co., has made a tender offer for 28 million GM shares. The offer, if completed, would more than double Kerkorian's stake in GM to 8.8 percent, the Reuters news agency reported. Tracinda has offered to buy the 28 million shares for $31 per share, valuing the offer at about $868 million, Reuters said.

"Absent Mr. Kerkorian's large purchase of GM stock, GM would be continuing to decline," Goodman said.

Is bankruptcy a possibility? "We see bankruptcy as unlikely, not because of any strengths of the business models of these automakers, but rather because many players who can affect the financial performance of GM and Ford also have a stake in seeing the companies avoid bankruptcy," Morningstar analyst Philip Guziec wrote in a recent analysis of GM.

"These include the United Auto Workers (UAW), politicians with manufacturing plants in their states, and debt holders who can be more lenient with debt covenants. We believe it unlikely that the UAW would kill the geese that are laying the golden eggs; a Chapter 11 filing would probably cost the UAW far more than the necessary concessions to keep the automakers afloat," Guziec said.

There are some bright spots. For instance, GM has narrowed the quality gap with Japanese automakers, Morningstar pointed out. GM is the highest-ranked U.S.-based automaker, "and with most brands averaging just over one problem per vehicle, quality has become practically indistinguishable between brands."

Unfortunately, reputation lags reality, and it'll take years for GM to overcome its old reputation of shipping low-quality vehicles, Morningstar said.

There's also the problem of health-care entitlements that are set by UAW contracts and are "crushing the company," Morningstar said. "We think the UAW negotiators will be smart enough to agree to reduce benefits and lower the value of these obligations, rather than kill GM."

Overall, Morningstar said, "GM is a high-risk investment. Its fixed costs and substantial long-term retiree obligations make it highly vulnerable to even minor performance variations. Rising interest rates could crimp GMAC earnings, a large component of net income."

Morningstar predicts "a serious drop" in GM revenue and profits for 2005, followed by flat sales in 2006 "and a slow recovery to a new position as a smaller version of its former self, growing at inflation."

So what to do if you hold GM securities?

Goodman said holdings of GM stock are "quite risky," and recommends that you use Kerkorian's offer "as an opportunity to cash out most if not all of your GM stock."

What about GM Smartnotes bonds? Like other GM debt, they've been downgraded to junk-bond status. That shows how risky the bonds are in the view of the credit agencies, Goodman said.

"It is highly unlikely that GM would ever default on your interest or principal payments," he said. Still, GM's weakened financial condition certainly has increased the risk in holding the bonds, he said.

'If that risk makes you feel uncomfortable, you might want to sell at least some of your holdings and go into investment-grade bonds instead," Goodman said.

Angela M. Thomson, head of the Rhode Island chapter of the Financial Planning Association, a trade group for financial planners and others, said you are probably holding GM stock for its dividend. The stock's dividend yield was recently around 6 percent.

Thomson, a Certified Financial Planner practitioner, said she would advise selling the stock and investing elsewhere -- for possibly higher yields.

For example, she suggests that you research some of the following potential investments, a group that includes individual securities as well as mutual funds:

Novastar Financial (NYSE: NFI), recently yielding about 19 percent.

Annaly Mortgage Management (NYSE: NLY), recently yielding about 10 percent.

Credit Suisse High Yield Bond Fund (NYSE: DHY), a closed-end fund, recently yielding about 12 percent.

Enerplus Resources Fund (NYSE: ERF), also a bond fund, recently yielding about 12 percent.

Alliance World Dollar Government Fund II (NYSE: AWF), recently yielding about 7.3 percent.

Salomon Brothers Global Partners Income Fund (NYSE: GDF), recently yielding about 9.4 percent.

There are risks with these, as there are with any investments. For instance, the first two on her list are in the mortgage business and are vulnerable to higher interest rates and a possible decline in the real estate market, she said.

But these and other alternatives are at least worth exploring, Thomson said in an interview at Coastal Financial Planning, her fee-only financial-planning firm in Lincoln. (You'd have to do research first.)

Although you may have to pay capital-gains tax upon selling your GM shares, she said, "I'd rather take gains and pay taxes on money I've made rather than [face] losses" on an investment, she said.

"I don't feel comfortable with GM. I think they're going to continue to have volatility in that sector," she said.

By the way: GM's next annual stockholders' meeting is scheduled for June 7 in Wilmington, Del.

TODAY'S TIP: For most people, tax-filing season is over. So what do you do with all those file folders and other paperwork left over?

The Internal Revenue Service has published a booklet that offers some answers. IRS Publication 552, "Recordkeeping for Individuals," discusses why you should keep records, what kinds of records you should keep and how long you should keep them.

For your free copy, visit your local IRS office or call the IRS toll-free at 1-800-829-3676. The booklet is also available for download from this IRS Web site:

www.irs.gov/formspubs

If you own a business, see IRS Publication 583, "Starting a Business and Keeping Records." To order a free copy, follow the steps listed above.

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline [at] projo.com

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