On Wall Street, the adage that savvy investors should do the opposite of more obvious appearances, taking advantage of reality’s lag time, has perhaps never been truer than now. That’s why many investors have long practiced the strategy of buy on analysts’ sell recommendations, sell on analysts' buy recommendations. And that’s why buyers have been snapping up financial stocks despite the fact that many banks remain perilously close to short-term danger in the fractured American economy.
The simple reason for this is that once something is completely and widely en vogue in the money-making realm, like buying GE’s stock was in the late 1990s, or buying second and third homes as an investment strategy was four years ago, the pendulum has probably already swung back the other direction. Most people just don’t know it yet, though.
That’s why I wrote my newest book Jeff Immelt and the New GE Way, and that’s why I think study of the leader and the business is more important today than ever before. Sure, GE’s stock has been battered worse in the past year than most others in the S&P 500. Yes, the image of Immelt and the once-shiny company now has a taint of tarnish because of too much debt, questionable exposure in its capital division, and the about-face decision earlier this year to cut the dividend by two-thirds.
But what if that is just the momentary more obvious?
Studying corporate leaders and the companies they run in a frenzied, bubble market like the one America experienced leading up to 2001 is easy. Bashing them in a rabid down cycle, without taking the time to stop and take a deeper look, is just as easy. Note a recent article by Reuters which asked if the legendary investor Warren Buffett is losing his touch because his financial miracle wand is no longer so effective in the economic crisis.
Such a suggestion is foolish, of course. Buffett is just a bull caught up in a stifling bear market. And he is human after all. Business is risk, even for Buffett, and risk is fraught with pitfalls, some big enough to trip up the likes of Buffett or Immelt when cycles drastically turn and debt becomes an enemy, not a friend.
The joke, of course, is not on Buffett, or even Immelt. The joke is on the investors who bought stocks like GE’s when it was trading at the height of the bubble with a price-to-earnings ratio in the 30s that was to be driven by a host of mature and well-wrung businesses handed over to Immelt by Welch. That was the time to sell, despite more obvious appearances.
Now, though, with fear ever-present as economic growth continues to run in reverse and the hint of a bull market by day sends chills through the night among tortured, angry souls who cannot figure it out, is the best time for investors to dig deeper into the styles and strategies of the most important leaders and companies, like Immelt and GE, determining where the quality is and where it is not for future investment returns.
One thing I immediately found when looking at GE is that when Immelt took over, he barely had a chance. The lofty price-to-earnings ratio had just one way to go, down. Factor in two hard recessions in eight years and one almost becomes sympathetic. Unless, of course, you are one who bought the stock near its high multiple. In this depressed market, GE’s shares are down from a 52-week high of $33.36, trading at just more than $13, with a price-to-earnings ratio of 8.5, as questions linger about the size of potential write-offs in its capital division and the future direction of the company in all divisions.
Many people are not happy about it, including Immelt.
But now, like never before, is the time to study and learn so decisions can be made outside of the more obvious trends. It’s the bottom, not the bubble, with likely just one direction to go. The question becomes, how far can leadership take it?
Immelt, of course, has made mistakes in his tenure as GE’s chairman and CEO. Like Buffett, or even Jack Welch, he is not beyond placing bad bets, or sticking with good ones too long. He certainly went too heavy and stayed too long in risky financial investments, including consumer credit cards and high-end real estate. The dividend took a hit, hurting the income of many long-time investors. But one should note that these same investors also pocketed some $40 billion in dividend payouts under Immelt’s leadership, which likely would not have been available were it not for profits earned by the now-questioned investments of GE’s financial division. In other words, many who have complained, including dividend-sensitive retirees, certainly benefited in recent years from payouts they otherwise might not have gotten.
What I also found in researching Jeff Immelt and GE transforming strategy is that he is orchestrating a global, layered business plan the likes of which we have not ever seen before. Investors could likely better understand GE when the company focused its business side on light bulbs and appliances. Those businesses still remain, yet Immelt’s signature has been busy reshaping GE into one of the world’s biggest problem solvers through its infrastructure divisions, providing energy, transportation and health care solutions in a broad, high-payoff scope.
He has the clout to sit with global political leaders. And when he does, Immelt opens up a book of diversified products and services including transportation, electric infrastructure and energy that he can sell and finance in-house. No other corporate leader in the world can do this.
How investors bet on the future from this bottom is certainly a matter of instinct, but I found that information in times like these matters far more than it does at the top, when everything seems obvious and easy.
As for Immelt, he knows he is on to something big, but he also understands the challenge: how effectively he and the company can deal with, manage and ultimately iron out the problems in finance so that the focus becomes almost entirely on GE’s industrial side of the business, with its capital division merely providing profitable, goal-oriented support.
And there’s something else: the direst forecasts may not be so dire after all. Appliances, a business GE remains firmly entrenched in, are suddenly looking much better, thanks to China’s consumer stimulus package, the bottoming of America’s housing crisis, and a sharp reduction in global appliance inventories. Similarly, consumer credit, which GE holds a big chunk of in its finance division, will no doubt suffer losses, but as housing bottoms and unemployment levels off, the worst-case scenarios may not be nearly so bad.
I found in my research and time with Immelt that he understands the challenge and the charge, clearly, and he fully accepts the pressure to deliver. I also found that he knows if he finishes the difficult task of properly reshaping GE, investors who got on board when the stock traded at a much more reasonable price-to-earnings ratio in single digits will be quite pleased with the company’s stock price returns going forward.