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If GM is a screaming buy...

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Q: Is it smart to follow Kirk Kerkorian's lead and buy General Motors stock (GM) now that the company has announced its restructuring?

A: Many investors like playing "follow the leader." Some mimic the moves made by legendary investor Warren Buffett. Others copy the bets made by mutual fund manager Bill Miller. Still others emulate billionaire Kirk Kerkorian.

If you were to pick an investor to copy, Kerkorian would be a good role model. He has made a bundle properly timing investments in everything from General Motors to casinos. And in May his investment arm, Tracinda, began to build a sizable position in GM for the second time. You can read about it by clicking here.

The performance of GM stock hasn't been all that stellar since Kerkorian's investment. But his splash into GM's stock was significant because it put pressure on management to address the reasons for the company's earnings and revenue underperformance.

The first real fruit came in mid-October, when GM announced a dramatic restructuring. It struck a deal with its unions to cut health care costs, which opens the door for more flexibility in controlling costs. But more important, GM's management for the first time said it would sell 51% of its highly profitable financing arm, General Motors Acceptance Corp. (GMAC). This was considered a big deal because by separating GMAC, the car-financing unit would be able to get higher credit ratings than it gets as a unit of GM. And that should help boost GMAC's profitability.

But don't just blindly follow Kerkorian. He can more easily afford to be wrong than you can (unless you're a billionaire, too). So before you run out and buy GM stock, you need to perform your own due diligence.

I can tell you that the stock's current valuation is attractive compared with its five-year history. Using BetterInvesting's Stock Selection Guide, the stock falls into the "buy" range, assuming it can boost earnings 5% a year the next five years as analysts forecast. But keep in mind you're taking tremendous risk with this stock and you should tread carefully. If you're not up for outsized risk, you might consider buying a diversified stock index mutual fund instead.


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I've been buying GM stock regularly since it tanked. They are still paying $2 a share dividend, and I have a good feeling they'll be back.

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