Studying companies as investment possibilities can lead to varying results. Sometimes a company is a clear yes or no based upon valuations or numerical data. Other times, a company is either ahead of or behind a strategic opportunity based upon a changing environment or new technology. Yet another option may be that we really need to study the company leadership to determine if that company is worthy of our investment dollars. I previously determined that General Electric (NYSE:GE) fits the criteria for my personal portfolio based upon valuations, dividend yield, and projected future earnings. However, in doing further reading I find many seasoned investors who have held this company much longer than I have distrust the company to ever do well under the present CEO, Jeff Immelt.
In order to accurately portray General Electric's performance during Mr. Immelt's tenure, it seems necessary to compare its performance against other benchmarks over various time periods. Additionally, we should consider what events were taking place in the world during those time periods which clearly affected the markets and/or GE stock in particular. It is only by attempting to understand how the stock performed given various timeframes and external factors that we will accurately portray the effectiveness of the current company leadership.
Some of the high points of Jeff Immelt's company bio page include the fact that he joined GE after receiving his MBA from Harvard in 1982. He held several leadership roles in divisions of GE before becoming a member of the board and eventually being appointed Chairman and CEO. Since that time, he has been recognized as one of the "World's Best CEOs" by Barron's.
That is all great to know. However, what we really want to know as investors is this: how sound is my decision to invest in General Electric?
The chart below shows GE stock from the day Immelt took over as Chairman through the last day of 2012. The chart also shows the performance of the S&P 500 as well as the Dow Jones Industrial Average for general comparison. Additionally, we overlaid external events related to the two major drops seen in the stock market during this time period, as well as the three rounds of quantitative easing put in place by the government to see how these events affected both the overall market and GE in particular.
As you can see, during this time period the S&P 500 gained over 20% and the DJIA gained over 25% while GE shows a loss of over 48%. I can immediately see why those investors who have held this stock for a long time have been disappointed to say the least. However, we can also see that the two major drops in the stock value occurred during significant external events. The first was the post-9/11 decline when GE declined 40%, and the second was during the housing bust when the stock dropped about 80% in value.
In early 2003, GE had declined approximately twice what the overall market had since Jack Immelt took the helm. Nobody could blame him for the events that took place on 9/11, but any CEO should bear some level of responsibility or credit for the performance of their company's stock. After all, former CEO Jack Welch's legacy is partly based upon the amazing performance of the stock during his tenure. If we re-examine the performance of GE against the same benchmarks beginning in early 2003, we see the following.
So if we remove the post-9/11 drop and give GE a "do over" from 2003 through 2012, the company still falls far short of the market overall. During this time period the S&P 500 gained 68%, the DJIA gained 63%, and again GE fell - this time by almost 13%. What is noteworthy is that GE quite nearly tracked with the market overall from early 2003 until late 2007. However, once the housing bubble burst along with the financial markets, GE dropped significantly farther than the rest of the market. There is plenty of discussion as to why this happened, but the majority deals with how GE was profiting from the housing market much like everyone else. When the issues with mark-to-market accounting hit the entire industry, GE's Capital Division took a major hit and the stock tanked. Since then, GE has taken steps to remove these assets from the books in an attempt to become more profitable.
If we give Immelt and GE a third shot and look at a chart from March 2009 through 2012, we see the following:
Since realizing that the financial arm of the company needed some major refocusing, GE has actually performed quite well compared to the S&P 500 and the DJIA. While both the S&P 500 and the DJIA are up in the neighborhood of 80%, GE climbed by almost 150%. What this really indicates is that although it takes time to make a turnaround with a company as large as General Electric, it is possible to outperform the market for some period of time. However, this can be shown with practically any stock we might choose. Picking and choosing a time period that supports our case is not satisfactory proof that the company has made a turn for the better. However, examining the company's financial statements for the past several years does show promising trends in net income, operating income, and profit margin.
So how has the company performed more recently compared to our benchmarks?
For all of 2012, General Electric performed on par with the S&P 500, and outperformed the rest of the DJIA by about 6.5%. GE had a significant lead on the indices in October and again in mid-December, but ended the year in a slide. Even so, had we invested in this stock as late as this year we could have seen adequate gains compared to either benchmark. When coupled with the dividend payments, we would likely beat the indices by a couple points.
So how much of this is really Immelt's doing? Just as we stated you can't really hold him personally responsible for external events that caused huge market declines, we probably should have some level of accountability for performance that lags the market. Likewise, perhaps some credit for performance above the market is in order. It turns out that Immelt has been rather busy making some changes in an attempt to boost GE's profitability. And yet while profitability is what investors seek, some of the changes are not very imaginative and don't sit well with Americans in general.
First of all, President Obama tapped him to take the lead on the President's Council on Jobs and Competitiveness in early 2011. Obama stated at the time that Immelt was needed to come on board with new ideas and "keep the momentum going." Others viewed it as more of a political move intended to reassure corporate America that there was no anti-business sentiment in the administration. It is no secret that Immelt comes from a very conservative background, so this was an obvious attempt to bring someone from the other team into the fold. However, considering the number of jobs that GE was sending overseas at that time, we have to wonder if his selection really sent the right message.
Next, according to the National Center for Policy Analysis, GE has undergone a fundamental shift as a result from the transition of leadership from Jack Welch to Jeff Immelt. This article points to the fact that under Welch GE was focused on making quality products that competed well in the marketplace. Under Immelt, the author writes that GE now invests heavily in sectors such as wind and solar, that while popular, are not profitable and rely heavily on government subsidies. Immelt himself states he wishes he had not promoted green initiatives so vocally, as it created the perception that he was more concerned with global warming than with GE business concerns and job creation. I am left wondering which version of the truth is reality.
Finally, there has been much made over the tax strategies employed by GE to reduce its tax liabilities. The thought of using creative strategies to move earnings offshore to avoid tax burdens seems distasteful to many people given the current financial difficulties the government is facing. And yet it seems to have boosted GE's bottom line over the past two years. Again, there are encouraging trends in net income and profit margins even if revenue and assets have declined. But how much of this is really a result of leadership?
So where does this leave us? Well, those who went long on GE before 2001 are faced with an interesting dilemma. The company dropped significantly twice since then, but appears to have perhaps made at least a temporary turnaround that may carry things forward into the foreseeable future. Yet that does little to soothe the feelings when an investor looks at an account statement and sees a number half what it used to be. At this point the loss is a sunk cost for anyone still holding the stock, but if things look better for the near-term future it could be foolish to cash in now.
Those who invested in the last four years likely have a different outlook. It would have been quite a stroke of luck to catch this stock at the exact bottom in 2009, but anywhere in recent history could have produced satisfactory results. In fact, despite the recent rise in the stock price, the company seems to be poised to perform even better in the future.
The problem is that there are hints that this could be a temporary "smoke and mirrors" type of recovery.
The bottom line is that Jeff Immelt does not appear to have taken any significant action that really inspires me to believe that he is the catalyst for the uptrend. Moving jobs offshore is a pretty well-established cost cutting move that is nearly played out. Maximizing the company's eligibility for government subsidies in sectors with potential future profitability is a newer technique. However, we are all aware that government spending cannot increase forever. Tweaking tax strategies to maximize profit -- also not that creative. And perhaps the biggest question is what will happen when the President decides to replace Immelt to bring on someone else "to keep the momentum going."
Additional disclosure: I am long GE but not adding to my position at this time. Special thanks to those who made me doubt the numbers alone.