Does General Electric Really Have An Accounting Problem?

| About: General Electric (GE)
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Summary

The fine analysts at Bernstein stated recently that GE is lagging its industrial peers because of its difficult accounting tactics.

Having dropped 5.4% this year already, big investors don’t seem to be too enthused about the current situation.

It seems as if GE is in all the wrong places right now to capitalize on this potential infrastructure boom that is supposed to happen here at home.

For the past year General Electric (NYSE:GE) has been wandering around in this range of $28 to $33 and doing nothing for investors. Pundits have their varying reasons as to why the stock has languished behind the S&P 500 during that time with reasons ranging from Jeff Immelt still being CEO to purchasing Baker Hughes (BHI) at the highs of oil prices. Regardless, shareholders remain shareholders for their own reasons. I own the stock as a speculative position in the portfolio because nobody can makes heads or tails of it in hopes that it strikes gold with one of its transformative strategies. Because I own it as a speculative position I believe it is a good time to examine one of the excuses why analysts believe the stock is languishing; the company's convoluted accounting tactics.

The fine analysts at Bernstein stated recently that GE is lagging its industrial peers because of its difficult accounting tactics. Despite making such a statement the firm reiterated an "outperform" rating for the stock of the industrial conglomerate and their price target of $38. The price target implies a move of 27%! I don't believe I could fathom a 27% increase in shares of GE in my dreams. The price target is predicated on the notion that GE has a lot of cash and if the company executes well on its transformation strategy it can grow earnings significantly. Now you see the reason why I own the stock for the speculation portion of my portfolio.

The culprit that Bernstein identified for shares of GE lagging was the complicated accounting tactics. Though the accounting tactics were created in the interest of providing investors the transparency they need to make their decisions the analyst believes it to be more intricate than it needs to be.

But rather than just continue to blame the corporate accounting tactics Bernstein at least offered up a solution and saw it as an opportunity for GE to placate investors. Some of the solutions offered up included "taking up a more conservative approach from goodwill to capital, contracts, pension and tax".

Having dropped 5.4% this year already, big investors don't seem to be too enthused about the current situation. For comparison purposes, the S&P 500 is up 6.2% and the SPDR Industrial Sector ETF (NYSEARCA:XLI) is up 5.5%. It seems as if GE is in all the wrong places right now to capitalize on this potential infrastructure boom that is supposed to happen here at home.

I actually initiated my position in GE in late November and have been pretty upset about the purchase thus far. I will only purchase shares if GE stays below $30, because I believe that is where it offers additional value. I've selected $30 because it is the middle of the stock's 52-week range and my average purchase price.

I swapped out of Delta Air Lines (NYSE: DAL) in favor of GE during the 2016 fourth-quarter portfolio change-out because I ended up turning a profit in the name (0.2%, or 0.6% annualized) and wanted to lock in those profits. So far, I have lost on the swap. For now, here is a chart to compare how Delta and GE have fared against each other and the S&P 500 since I swapped the names.

Source: Google Finance

At the end of the day, it only matters what a stock has done for one's portfolio. For me, GE is one of my mid-sized positions and hasn't done anything, as I'm down 2.5% on the name, while it occupies roughly 6.8% of my portfolio. I continue to believe in the name because it still has great earnings growth projections for the near and long term. I own the stock for the wild card portion of my portfolio, and I will continue to hold onto the stock for now. I am up 18% since the inception of my portfolio, while the S&P 500 is up 14.4%. Below is a quick glance of my portfolio and how each position therein is performing. Thanks for reading, and I look forward to your comments.

Company

Ticker

% change incl. DIV

% of Portfolio

Facebook, Inc.

(NASDAQ:FB)

15.1%

9.7%

AbbVie Inc.

(NYSE:ABBV)

12.3%

4.1%

PulteGroup, Inc.

(NYSE:PHM)

7.5%

3.9%

SEI Investments Company

(NASDAQ:SEIC)

2.8%

7.5%

3M Company

(NYSE:MMM)

2.8%

3.7%

O'Reilly Automotive, Inc.

(NASDAQ:ORLY)

0.9%

4.0%

V.F. Corporation

(NYSE:VFC)

0.1%

10.3%

Valero Energy Corporation

(NYSE:VLO)

0.0%

3.6%

Wyndham Worldwide Corporation

(NYSE:WYN)

-0.1%

3.6%

General Electric Company

-2.5%

6.8%

Silver Wheaton Corp.

(SLW)

-9.1%

8.5%

Gilead Sciences Inc.

(NASDAQ:GILD)

-15.0%

19.2%

Cash

$

15.06%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long GE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.