General Electric, Berkshire Hathaway: Winners in a Losing Market

There are many losers in today’s financial markets. In short, if a company has exposure to any kind of assets that are mortgage related, then it is likely that Wall Street is punishing the share price. Different financial segments are getting hit, such as the brokers (Bear Stearns (BSC), Lehman Brothers (LEH), the banks (Citi (C), Wachovia (WB)), the monolines (Ambac (ABK), MBIA (MBI)), the insurers (AIG (AIG), Hartford Financial (HIG)) and the mortgage REITs (RAIT Financial (RAS), Thornbug (TMA)).

Right now, trying to catch a bottom in these stocks is extremely difficult – it seems like there is no end in sight. Several of the aforementioned stocks that are getting hit right now may eventually go higher when (and if) they recover from the current financial crisis (we are not there yet!). However, it is the purpose of the article to identify the companies that can take advantage of the current financial meltdown and profit from the misery of others.

An obvious choice as a winner in today’s environment is JP Morgan (JPM). Since JPM’s acquisition of Bear Stearns is currently all over the news, I will not go into depth of their acquisition.

In my opinion, two other companies stand to benefit from the financial crisis – General Electric (GE) and Berkshire Hathaway (BRK.A) (BRK.B). Both companies maintain a AAA credit rating – and essentially are the only financial companies that carry such distinction (the other companies are Automatic Data Processing (ADP), Exxon Mobil (XOM), Johnson & Johnson (JNJ), Pfizer (PFE) and UPS (UPS). Technically, Freddie Mac (FRE) and Fannie Mae (FNM) are also AAA rated, but they can’t invest like GE and BRK.) The strong credit ratings of GE and BRK allow both companies to have an overall lower cost of capital while making investments, increasing overall returns. In addition, both GE and BRK are large enough such that they can make big investments that other companies may not be able to make

In addition to their excellent credit ratings, both GE and BRK are similar in that both are conglomerates. One big advantage to the conglomerate structure is diversification. There may be periods where some businesses may be struggling within the conglomerate, but other businesses may be excelling to offset the struggling businesses. Another advantage of the conglomerate is that cash generated from the businesses can be reinvested into other business lines and/or other passive investments. Both GE and BRK have huge investment and finance divisions, and both have historically been good allocators of capital.

Considering both their strong credit ratings and their track record for making good investments, I believe that both GE and BRK provide interesting investment opportunities. In my opinion, the biggest risk for both these companies is that their businesses may struggle as the U.S. recession continues (assuming we are in a recession, which I believe we are). Each investor will have to weigh the benefits of the potential opportunities these companies will have versus the tough business environment. The result may be erratic share prices in the short term with above average returns for long-term investors (over two years).

Disclosure: Author is long both GE and BRK.B shares

Comments

[User 165121]

I think GE will do well even if US economy struggle as they are a truely global company with desireable products and well managed. I am amazed at the stupidity of many so called financial experts who think Apple, the one trick pony fad of the day, is worth more that GE with products used in every corner of the world from jet engines, to energy, to medical equiplments.

[No Moss]

I think GE's value will be realized fairly soon now. It has been flat for many years despite a record of increasing earnings and dividends. If it breaks out, it could be a large breakout, perhaps up to $40 by year end. It should be trading at a multiple of at least 17, which would give it a price of $41 on concensus earnings of 2.43 for 2008.

I don't know enough to make recommendations, but I'm sort of surprised that they keep NBC Universal. It just doesn't seem to be congruent with their other holdings.

Water, power, transportation, medical devices--good stuff. Siemens got their tail kicked. Maybe it's hard to compete in Euros with GE quoting in dollars.

[Gail L]

These are the only two stocks I own at the moment. I'm either a guru or...

[Elliott R.]

G.E. has some of the best scientific minds in the world and when coupled with their vast diversification endeavors and successful management teams, this company has been grossly neglected from an investment point of view.

[murphyhoover]

i enterd ge long at 33 based on CEOs speech to the governors conference in Mivhigan, televised on c-span tv program several weeks ago, does anyone have a grip on the mortgage loss exposure at GE financial, are the write downs and reserves sufficient to support the forward earnings, i get the impression that investors are satisfieded and that things appear fairly tansparent, also heard its a small part of the big picture at this point

[MGS]

I agree with the author but will add a different take as well on GE. I also like GE particularly due to their emphasis on "green" energy sources and solutions. Externally, companies of all types are increasingly under scrutiny for their social corporate responsibility and environmental practices and commitments. Internally, companies are facing increasing pressures for cost cutting and enhanced energy efficiency is also a major step in this direction. GE has been a pioneer in this area and will help companies facilitate technical and process advancements. GE is also present in the defense sector which is not going away either.