Years ago General Electric (GE) had the highest market capitalization of any company. This enormous conglomerate is a household name and is considered to be a bellwether of management philosophy and American capitalism. Should investors concentrate their holdings on large positions in a lauded management team which leads a conglomerate diversified across industries?
On the contrary, investors should not put all their eggs in one basket. Investing in a large number of separate stocks is superior to investing in a small number of conglomerates. First and foremost, separate stocks are firewalled against the losses of other stocks. The limited liability stock investors enjoy has the fringe benefit of keeping losses from one stock infecting another. Unfortunately, any shared liability between the holdings of a conglomerate would spread losses from one subsidiary to another. Secondly, historical returns have favored smaller stocks over larger ones (the small firm effect), which weighs against mega cap conglomerates like GE.
Fortunately there are many stocks which can be bought as surrogates to GE, providing industry diversification with better financial metrics. The future financial potential of a stock can be gauged by using financial metrics to determine how cheaply a stock is priced, its ability to weather hardship, and its growth potential.
As alternatives to GE, consider the following stocks with solid credit scores:
Ticker | Company | Industry | 10-Year Average ROE | Altman Z-score |
Ennis Inc. | Office Supplies | 11.0% | 4.60 | |
Ingles Markets Inc. | Grocery Stores | 10.5% | 3.01 | |
Nash Finch Co. | Food Wholesale | 8.5% | 5.61 | |
Synalloy Corp. | Steel & Iron | 4.8% | 5.15 | |
TESSCO Technologies | Electronics Wholesale | 9.5% | 5.63 | |
GE | General Electric Co. | Conglomerate (Many) | 17.5% | N/A* |
*GE's financial subsidiary, GE Capital, cannot be assigned an Altman Z-score.
These alternative stocks are all categorized as "safe" according to the Altman Z-score,* indicating that they are not considered alarming bankruptcy risks.
What's more, these stocks are cheaper and have better growth prospects than GE:
Ticker | P/E | P/S | P/B | EPS growth past 5 years | EPS growth next 5 years | Div Yield |
EBF | 11.3 | 0.82 | 1.18 | 2% | 17% | 3.8% |
IMKTA | 10.2 | 0.12 | 0.98 | -2% | 13% | 3.8% |
NAFC | 8.7 | 0.07 | 0.9 | 5% | 15% | 2.4% |
SYNL | 12.9 | 0.44 | 1.08 | -6% | 19% | 2.1% |
TESS | 10.0 | 0.21 | 1.54 | 19% | 15% | 3.3% |
GE | 15.4 | 1.35 | 1.71 | -8% | 13% | 3.6% |
Based on lower price multiples, these stocks are cheaper than GE at current market prices. Better yet, they have higher growth prospects according to historical trends and analyst projections. Thus GE's price would have to drop significantly to become competitive with these stocks, because at current valuations they are simply better deals. Moreover, like GE, each of these stocks provides a dividend yield in excess of the 10-year Treasury yield.
Rather than restrict yourself to concentrated investments in a familiar, celebrated stock, consider a diversified mix of these five securities as a more attractive alternative. This portfolio is cheaper and more likely to see higher earnings.
Please read the article disclaimer for this article and Altman z-score calculations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
