Several years ago, Exxon Mobil (NYSE:XOM) and General Electric (GE) were often both considered model blue chips. In fact, if you do a web search for the phrase "bluest of blue chips", this article written by Tim Beyers in 2006 is one of the first that comes up, "The Bluest Blue Chip". Beyers mentions General Electric and Exxon Mobil (along with Citigroup (C)) as model blue chips right off the bat:
In investing, blue chips are the blue bloods of the market. They're old, rich, and have delivered extraordinary returns for decades on end. Think of firms such General Electric (NYSE: GE) , ExxonMobil, and Citigroup (NYSE: C).
XOM looks a lot more like a Blue Chip than GE today
If he were re-writing that second sentence today, I bet Exxon Mobil would be the only one of the those three stocks Beyers would describe as a model blue chip. It's striking to consider some of the differences between General Electric and Exxon Mobil today.
Examples of How XOM and GE have diverged
- Although for years General Electric and Exxon Mobil were among the handful of U.S. companies rated AAA by Standard & Poors, of the two, only Exxon Mobil has kept its AAA-rating.
- General Electric required a bailout during the financial crisis; Exxon Mobil didn't.
- Although General Electric's shares have recovered from their 2009 lows, they are still trading about 40% below where the were 5 years ago; in contrast, Exxon's shares are about 40% above there levels of 5 years ago.
- As of Friday's close, Short Screen (available in Seeking Alpha's Investor Tools Store) showed an Altman Z-Score of about 1.19 for General Electric and about 4.75 for Exxon Mobil (Z-Scores below 1.81 are considered an indication of financial distress; Z-Scores of 3 and above are considered an indication of financial strength)1.
- Exxon Mobil produces products for which there is market demand; General Electric has increasingly relied on government subsidies for its "Ecomagination" green energy initiatives (A Washington Examiner article a couple of years ago suggested "Subsidymagination" would have been a more apt name than "Ecomagination").
- As the New York Times reported recently ("G.E.'s Strategies Let It Avoid Taxes Altogether"), General Electric paid no U.S. federal taxes in 2010; on Exxon Mobil's blog Friday ("ExxonMobil's earnings: the real story you won't hear in Washington"), Exxon Mobil VP Ken Cohen noted that his company's "total taxes and duties to the U.S. government [in 2010] were $9.8 billion, which includes an income tax expense of $1.6 billion."
An update on the costs of hedging XOM and GE
In a previous post ("Hedging the Dow: An Update"), we looked at the costs of hedging Exxon Mobil, General Electric, and the other Dow components against greater-than-20% losses over the next several months, using the optimal puts for that. The current costs of that level of downside protection for General Electric and Exxon Mobil (as well as for the SPDR Dow Jones Industrial Average ETF, for comparison purposes) are listed below, but first, a quick reminder about what optimal puts are, and why I've used 20% decline thresholds here.
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. With Portfolio Armor (available in Seeking Alpha's Investing Tools Store, and as an Apple iOS app), you just enter the symbol of the stock or ETF you’re looking to hedge, the number of shares you own, and the maximum decline you’re willing to risk, (your threshold). Then the app uses its algorithm to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
You can enter any percentage you like for a threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). The idea for a 20% threshold comes, as I've mentioned before, from a comment fund manager John Hussman made in a market commentary in October 2008:
An intolerable loss, in my view, is one that requires a heroic recovery simply to break even… a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).
The table below shows the costs as of Friday's close of hedging each of those securities against >20% declines. Given that Exxon Mobil is the more solid company (as judged by its credit rating, its financial strength, and its ability to weather the financial crisis without a bailout), it might seem surprising that the cost of hedging General Electric against the same decline was slightly lower on Friday. Note, though, that Exxon Mobil's downside protection is based on optimal puts expiring a month later than General Electric's, and, all things equal, options with expirations further out generally cost more.
|Symbol||Name||Cost of protection (as % of position value)|
SPDR Dow Jones Industrial Average ETF
*Based on optimal puts expiring in September, 2011.
**Based on optimal puts expiring in October, 2011.
A final question
Considering that Exxon Mobil has been the company that has generated more shareholder value by far over the last five years, the one that didn't require a government bailout, and the one that paid U.S. taxes last year: why was it General Electric's CEO who was appointed chairman of The President's Council on Jobs and Competitiveness?
1Although General Electric operates in a number of diverse industries, its Standard Industrial Classification (SIC) code characterizes it as a manufacturing company, which is why Short Screen automatically applies the Altman Z-Score to it. Short Screen applies the Altman Z-Score to Exxon Mobil for the same reason.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long puts on DIA.