My focus is “Investing Wisely,” e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating modern analytics within these cycles means maintaining a process of the thorough fundamental technical and consensus analysis of the many companies in my universe.
Within the capital goods sector this begins with high profile companies such as General Electric Corp. (NYSE:GE). I believe that this discipline provides the necessary clarity regarding the rotation that almost all companies goes through - from favorable times to unfavorable times and perhaps back again.
The current market capitalization of GE is over 320+ billion, making it the second largest company in the US, and General Electric Corp. is now the 4th largest revenue producing US company. However, it is by far the largest in the capital goods field with Ford (NYSE:F) and General Motors (NYSE:GM) also in the top tier.
Unfortunately, as a 50+ year veteran financial analyst and portfolio manager I am convinced that GE shareholders do not fully understand just how poorly the longer-term price performance really has been. In the year 2000, the stock sold for $48/share and by the end of 2002 the shares sold for $17/share. Those same shares recovered to $37/share in 2007 and have since dropped to a current price of under $16/share. I am sad to say that is completely unacceptable performance for any shareholder. The most basic of fundamental valuations (earnings/cash flows analytics) have accurately foretold that this was going to be the result of holding GE for the long-term.
You might want to study the green earnings/price chart below, and you will quickly have a clear picture of why. The bar charts of earnings per share and price/earnings ratio are and have substantially under-performed.
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After Jack, the company has had and continues to have excellent management that dominates its industry very well. It is clearly a very stable and consistent organization. Some may think that trading in a similar or lesser manner with the indices (DOW, S&P, etc.) is wise. I disagree, with caveats. As mentioned above, over the past 10 years or so, it has not been a profitable place to have invested your money. This fine energy company continues to qualify as a “quality” firm. Keep in mind that there are other, often smaller, capital goods companies that have produced a far better ROI over recent years than General Electric Corp.
While earning estimates are on balance positive for General Electric, there is still a consideration that is often overlooked: How will Wall Street reward or punish General Electric or any other company in the future? It appears to me, by comparative analytics, that the upside for GE is limited in the short-term.
The estimates that are presented are divided into two aspects of my valuation process. They are “now” and “later.” These are my terms rather than the two year, five year, 10 year, etc., which is often the conventional approach. I believe valuations beyond a couple of years is reaching or stretching a good thing and often a waste of words and time. That is because valuations must be adjusted rather frequently as the cash flows and other fundamentals of the company change.
My analytics, to a large degree, have to do with comparative analytics. Comparing GE with its peers and other top capitalization/revenue producing companies in general, provides a clear and only a modestly positive story of both GE and the capital goods - sector. Dividends do not replace poor price performance and never have.
Timely news includes the fact that GE has an acquisitions eye on India (that’s smart). The investment projections in China are in the range of 1.5 billion (that’s smart too!). But both the recent longer-term share price decline of GE and of several peers is a concern.
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As a sector, capital goods and many its component-companies, are more recently difficult for investors to profit from. This is likely due to the revenue-dynamics and political interference that evaluations are often tough to figure. However, energy firms in a negative economy are perhaps and will likely remain solid investments. Typically, at the bottom of an economic cycle, they can appear to have relatively high price/earnings ratios. However, when the economy improves and appears to be topping, the price/earnings multiple then tends to shrink. In GE’s case, if forward earnings slow price/earnings ratios will be on the rise.
This perhaps explains why many companies trade for high multiples (perhaps 15 or 20 or more - times profits) during bad economic times, and end up trading for less than ten-times profits when earnings growth having fully taken advantage of the improved economy.
So at this time, with regard to General Electric we can perhaps blame the economy. General Electric is not doing very well to say the least.
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My analytic focus (to invest or not to invest) on any company is most heavily weighted on fundamentals. General Electric Corp. appears to have the prospect of improving earnings. Consensus projections call for a decent increase next year. For me, this is just a warning (something to consider) prior to buying. For prudent investing those earnings will have to remain strong over a quarter or two before I would consider it be a “wise investment.” Relating GE to its major peers, clearly most all should do just fine. "Just fine" is good but not as good as – "very well" to "excellent." I’m seeking excellence when I invest.
(Click to enlarge)
The “corporate governance” for GE is: Board (low risk), audit (low risk), compensation (low risk), shareholder-rights (low risk). These ratings are “right on” according to me.
As for the financial statements, all look very good, however nothing appears positive or compelling. In summary, General Electric Corp. revenue, operating income, net income and balance sheet all increased/improved, and appear to be on track. The most current earnings and revenue results have come primarily from a very high demand for oil and gas.
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The price activity of GE moved nicely until this past April. Since then it has declined from 18.8 to 13.7. I consider this rather large consolidation quite significant to my study. From the June lows of 13.7, it is now only at the high 16s. That’s not a good relative strength move for GE. These numbers (prices) are an important consideration before making an investment decision to buy or short any security. That’s a warning on GE.
Fundamental Valuation / Comparative Analytics:
General Electric Corp. valuations, return on equity and price targets: My valuations uses GE's current multiple (price/earnings):
Approx. Current Price
Current Multiple (Price/Earnings)
ROE -- (My Opinion)
PEG -- (My Opinion)
9.9 -- (very low compared to previous years, but modestly improving!)
Est. Low / High – Price Target Range (US Dollars)
Average Estimated Price (US Dollars)
Percent Change from Current Price
16.1 / 17.5
18.2 / 20.5
This Yr. / Next Yr.
Valuating GE to its Peers: GE will over-perform – but not enough. Therefore consideration of alternate and more competitive companies may be prudent.
Notes: Most financial analysts determine the price target range by estimating a future earnings per share and then applying a price-to-earnings "multiple," also known as the price/earnings ratio. I calculate price targets for both the current and next fiscal year by applying the stock's present multiple to the average professional analyst's estimate and then do some rather foxy tweaking.
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Economically speaking there is always a concern or question as to what the US Federal Reserve Board may or may not do regarding the management of the economy. Now that elections are over we know and history confirms that little is done proactively until maybe early next year. We also know that rallies have come when the Fed injects capital or a fiscal stimulus into the economic system, but that is becoming an "old news" factor. How this plays out over this post election period with the energy does not seem to have much effect on GE’s future growth.
We also know that GE is a big player in today’s global economic picture, something that is very important to take that into account before investing.
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My Technical Thoughts / Analytics
The general market and many companies are obviously on a tear, except for the pullback of the past couple of days. The "tear" and this pullback, like all such things – will come to an end. So for the marketplace, the consumer goods sector and GE it is too late to buy and too early to sell.
I remain 100% in cash and am waiting for a bearish inflection point to take new positions. That may occur in a couple of weeks or perhaps sooner. The internal topping action is continuing. However, this past week was on balance very positive. That’s good if you are forecasting a near-term top. So for this old bearish fox (technically speaking) I’m pleased with the statistics, indicators and charts.
For a current (up to the minute) chart of GE and 22 other high profile companies click here and then scroll down.
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So while the general market may be in for a pullback, the prevailing question from most investors is: How big will it be? Do I hold my current positions or do I sell? The answer will be obviously quite clear when it (the pullback) is over but an old axiom tells us to be prudent in times like this. You might want to remember that cash is always an excellent safe harbor. However, if you are a proactive investor, taking bearish positions may be also being wise.
I believe a correction is coming, and soon. When it does arrive, it will likely have a negative effect on General Electric and many other securities in the energy sector. So, the second question is always WHEN – for both rallies and corrections? The answer to that question is one that we can be sure of: There will be future rallies and pullbacks as the marketplace cycles. You can easily confirm this by simple looking at historic long-term charts of the stock market itself or just about any company or ETF.
The point is that indices and securities all go through “cycles" in one manner or another. Typically, when over-extended prices occur, they turn down. The opposite is also normally true - when over-contracted prices occur, they turn up. The trick is to have a methodology in place that both take advantage of these facts and also offers a consistent and a high probability of profitable - future investment decisions. That’s why I have always started my analytics with detailed fundamental analytics of high profile companies like General Electric Corp. I believe that, GE and its present fundamentals will continue to be an excellent leading indicator for the consumer goods sector.
It is important that this article be viewed not as a recommendation for the purchase or short sale of General Electric Corp. Favorable to the process of “investing wisely”, it is intended to suggest that its sector and sub industry groups has both positive and negative companies and ETFs (components) to consider when making investment decisions.
GE, within my analytics, is just an excellent “bellwether” company to help identify candidates for buying and candidates for short selling as the marketplace cycles from bull to bear and back again over and over and over again. Thus, we are presented frequent and conservative opportunities to invest or to simple hold cash.
The good news about the current marketplace is – we are presented frequent and conservative / low risk opportunities to invest – long, invest – short or to simple to hold cash. For me this plus watching the bottom line is “investing wisely.”
Disclosure: No position