December 4, 2017
Several weeks ago I was chatting on the phone with Ted Snow, veteran financial advisor and author of our forthcoming beginner-level books on investing, The Investing QuickStart Guide. I was curious about GE [NYSE: GE].
The price had been steadily falling throughout 2017, and I was in the market for new value stock investments.
“If it drops below $20, then I’m interested,” Ted said.
Keep in mind, this was not Ted advising me on my investment decisions, but just a work-related chat that drifted into the financial news of the day. Ted’s tendency is to embrace Warren Buffett-like contrarianism in investing. Throughout his book, he encourages his readers to “buy into weakness and sell into strength.”
GE recently fell below the $20 price threshold and looks positively weaker than ever.
I certainly have room in my portfolio for a new blue chip, and I’d love more exposure to the industrials and the energy sector, which are both represented in GE’s conglomerate business. But wow, at this particular moment in time it’s really hard to pull the trigger on this stock.
Warren Buffett’s contrarian mantras are rattling around in my head—“be greedy when others are fearful”—but even the Omaha Oracle himself had to part ways with GE in the fall of 2017, divesting the last of his 2008 three-billion-dollar investment in the company.
Buffett made the investment amidst the carnage of the financial crisis and sold out at a 40 percent profit.
The question now facing me and many other investors is whether or not the current sub-$20 stock price is a good buying opportunity. Time to sit down, collect my thoughts, and figure this one out: To GE or not to GE. That is the question.
The Story of a Corporate Giant
Last week I wrote about Apple Inc., and some of you may recall that Apple is well-known for being the most highly valued corporation in the world, a distinction that many years ago belonged to the now flailing General Electric Company.
For much of its 125-year lifespan as a corporation, GE has been a giant among giants. Of the twelve stocks that originally comprised the Dow Jones Industrial Average in its 1896 debut, GE is the only remaining member.
GE makes turbines, health care technologies, jet engines, and—prior to the November 2017 restructuring program announced by current CEO John Flannery—GE was also a big player in light bulbs, energy sensors, and diesel engines for locomotives.
The soon-to-be-phased-out GE Lighting Division, in fact, has historical ties to Thomas Edison himself.
A Kingdom in Collapse
“Venerable” is the word chosen by Forbes contributor, Jim Powell to describe a company that he contends has overcome setbacks in the past and will likely overcome those of the present day. Powell is one of four “value experts” recently featured by Forbes who are bullish on GE in the midst of its current turmoil.
Not everyone, however, is convinced by GE’s “venerable” qualities, nor are they impressed by the Boston-based company’s lengthy and illustrious history. TV personality Jim Kramer calls the stock “still overvalued at $20” and questions the legitimacy of the company’s free cash flow forecast of six to seven billion dollars.
Whether or not this cash will materialize is important. I’ll explain why.
Given that GE is pulling back in so many areas in hopes of maximizing profits in its better-performing divisions (aviation, power, and health care) the company’s deployment of free cash flow toward growth and betterment is essential to getting things back on track. If the company cannot in fact generate that cash according to its forecasts, then investors could be looking at stagnation at best and more downward spiraling at worst.
Searching for the Bottom
My personal sentiment toward GE is well-aligned with that of the value investors who believe that legacy blue chip companies like GE are just plain hard to sink.
Not that it doesn’t happen; with the right financial mismanagement even good companies fail, and GE is not exactly a good company at present.
Big companies also fail—just ask Bear Stearns.
But in the case of GE, it appears the necessary actions are underway to right the ship. The dwindling down and selling off of struggling divisions and their assets should help the company redefine a solid core. It’s like GE is trying to center its energy, very Zen-like. The company will then build outward from that place of strength, aided by the additional cash freed up by the dividend cut.
Sounds like a plan, and a good one at that!
Speaking of the dividend cut: if you do end up buying your fill of GE in the midst of this downswing, you may want to wait a little while before pulling the trigger on the trade.
Institutional investors and long-time GE stock owners will need some time to assess whether or not to hang on to GE in light of its diminished dividends. Many of these investors do not possess the agility required to unload all of their shares promptly in the aftermath of Flannery’s dividend-slashing announcement.
The announcement was made on November 13, 2017. If the bulk of dividend-conscious stock owners decide to ditch the stock, then you will see a gradual sell-off over the next several weeks. Some analysts predict a price drop below $18.
For you options cowboys and cowgirls out there, there may be some reasonable profits to be had on short-term puts.
I want a reason to believe in this stock, and I may still end up buying in. As my wife and I shop for a new home in California, we are certainly in the market for more large-cap value positions, the lower the beta the better.
Is GE a steal right now and in the coming weeks? All things considered, I think it likely is. The prospect of a total dismantling of the company seems less likely to me than a gradual and steady rebound.
But I wouldn’t buy in big here without a rigorous risk inspection.
In particular, I’d like to know whether GE is strong enough to withstand a major market downturn. If it is not, then perhaps I would look to sector competitors like Honeywell International Inc. [NYSE: HON] or United Technologies Corporation [NYSE: UTX] for alternative buying opportunities.
In other words, I like the idea of buying into a beleaguered blue chip, but I’d pay particularly close attention, for instance, to the company’s 1.79 debt-to-equity ratio and whether a string of bad quarters might lead to another, potentially terminal, asset sell-off that settles outstanding debt while leaving stockholders in the lurch.
Such an event is not likely to happen, but if you are thinking about scratching your contrarian itch and filling up on GE shares, these nightmare scenarios are worth a second thought.
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DISCLOSURE: The author currently holds no position, either long or short, on GE at the time of this writing. That said, there is always the risk of the author deciding to put his money where his mouth is by acquiring shares of this stock.
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