I write to better understand the market and process my feelings regarding investments (and I'm a bit of a stock geek). Earlier this month, I published a piece on General Electric (NYSE:GE) called, "Is General Electric The Perfect Company?" In conducting my research, I was wowed by how poised for success the company's core operations are, and despite his poor reputation, how CEO Jeff Immelt navigated a very large and troubled ship through some difficult challenges while minimizing risk to GE's stakeholders (I'm not saying dividends were not cut and the stock has not underperformed; I'm saying given the stakes involved, it could have turned out a lot worse). At the time, I chose not to "buy", because the valuation seemed a little rich and there was still some restructuring left to be done.
Now I'm writing to say, I have changed my mind and am an investor in GE. What changed in two weeks? A lot of little things, which collectively mean a lot.
Six Decision Catalysts
First, the price went down. I bought at $25.65, 3.4% less than the weekend I conducted my research. You may say that is just noise. Well, given that the equity market returns about 8% annually and GE pays 3.3% annually, all I need is another 1.3% from the date of my research to get a year's return!
Second, as the price dropped, so did the PE. GE's forward PE is now 13.9x forward (2015) earnings. I think that is a fair multiple for a focused, yet diversified company with leading technologies and pricing power. Earnings estimates can increase rapidly (and decrease faster) as the business environment improves. I would not be surprised to see upward revisions (and price targets) as the global economy recovers.
Third, GE is selling the non-core appliance business (see my article: "Update: General Electric Wants To Sell Its White (Elephant) Goods Business". The sale of this business will remove a low-growth, highly competitive business from GE's portfolio. The sale will also raise between $2-$4 billion. While appliances were once an industry leader, past under-investment has left GE with a premium brand, but essentially a "me-too" product. Selling is the right move.
Fourth, the Synchrony IPO. GE is expected to raise about $3 billion from the sale of 15%. The remaining shares will be spun-off to shareholders in 2015. The sale makes GE less of a volatile finance company and more of an industrial company.
Fifth, the $36 billion in orders garnered at this month's Farnborough Air Show reinforced my belief in the continued growth of the global economy (notwithstanding a few bumps we will get along the way) and in GE's strong position in the ultra-profitable aviation sector.
Sixth, GE is much closer to being a pure play in tomorrow's industrial technologies. Focused companies command a higher multiple on Wall Street. This will be true for both the core GE business and the spun-off Synchrony business.
Eight Reasons for Buying
So, all in all, I think GE has 1) a set of businesses with high barriers to entry, 2) which are technologically sophisticated, 3) geographically diversified and are 4) generally pseudo-oligopolies. The company is now 5) more focused and 6) less expensive than earlier this month. I still get 7) strong management and a 8) 3.3% dividend that the CEO says, "is going to keep going up".
The world appears to be getting more dangerous by the day. To-date, the market has shrugged off geopolitical concerns with an "it does not impact me" attitude. This could change quickly. And, as has been widely reported, the stock market has been on a straight upward trajectory for quite a while and many are forecasting a "correction". Personally, as long as interest rates and inflation remain low, I think the stock market is the only game in town. There is still significant amounts of money on the sidelines and in bonds that can be invested.
One Final Thought
I am long today. I believe in the thesis presented. However, if GE stock jumps in a short period or if the world starts to look really scary or if it looks like the Fed will finally raise rates, well, I reserve the right to change my mind.
Disclaimer: This article reflects the personal opinions of the author and should not be relied upon or used as a basis in making an investment decision. Investors should always do their own due diligence prior to making an investment decision.
Disclosure: The author is long GE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.