Typically when I write about individual stocks on this blog I share bullish ideas that I am either long or thinking about going long. I was recently doing some work on AutoNation (AN), however, and since the stock looks pricey to me I figured I would share a bearish case as well.

The reason for a contrarian like me to look under the hood of AutoNation is pretty straightforward. The U.S. automobile industry is obviously struggling right now but AN has strong management and the dealers are in better shape than the car markers themselves (cost structures are more in-line without union obligations, etc). Couple that with strong buy side interest from Eddie Lampert’s ESL Investments and Bill Gates affiliated Cascade Investments and my interest was peaked.

That said, it appears that I missed the boat on AutoNation, at least for now. The stock has soared 350% from under $4 per share to near $18, just below a 52-week high. The stock’s P/E of around 20x is high, but part of that is due to cyclically poor earnings during the current recession.

I looked back at AutoNation’s financial statements for 2006-2007 and found that earnings per share peaked at around $1.45 during the boom years. Even at that level of profitability, AN stock trades at 12 times earnings, hardly a bargain for a slow growing automobile retailer.

AutoNation has a strong share buyback program in place, which is attractive to me, and the auto retail business should slowly improve in coming years, so AN is on my radar screen. However, given the current price and the move the stock has already made (ESL and Cascade timed their buys very well), I am not a buyer here. If we got down to the low teens, perhaps I would take another look.

Full Disclosure: No position in AutoNation at the time of writing, but positions may change at any time

I kid, of course. The market is up 200 points today, not because GM is filing bankruptcy, but rather because investors seem to understand that the event itself is not at all catastrophic. After all, Chrysler is emerging from bankruptcy shortly and actually saw sales go up after they filed. It seems that most people, investors and car buyers alike, understand that Chapter 11 is a legal corporate process first and foremost and should be an afterthought to car buyers. Still, who would have thought the market would react quite so well initially?

Two short points on GM. First, the stock is up 20% today to about 90 cents. It’s worthless, folks. Those who still grip their “efficient markets hypothesis” tightly can use this as a perfect case study against the theory.

Second, how will we be able to judge whether “New GM” is viable long term after they emerge from bankruptcy (which many say will be before summer ends)? It’s all about cost structure. Many attribute their latest woes chiefly to the weak economy and lack of credit, but they seem to have forgotten that GM was a money loser in 2006 and 2007, when credit was flowing more freely than any other time in our history.

Consider the chart below, which shows how far from profits GM has been over the last three years:

As you can see, GM needed a near-10% mark-up over cost to breakeven on their vehicles. They never hit that goal in 2006-2007, even before they started selling cars for less than they built them for in 2008. If “New GM” can get their costs down, and have them be predictable and stay low, the company might be able to make a comeback down the road. It won’t be easy, but Chapter 11 was the only way to make it even a reasonable possibility.

Full Disclosure: No position in GM, past or present.