General Electric, Berkshire Hathaway: Winners in a Losing Market

Includes: BRK.A, BRK.B, GE
by: Dan Braem

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 (NYSE:BSC), Lehman Brothers (LEH), the banks (Citi (NYSE:C), Wachovia (NASDAQ:WB)), the monolines (Ambac (ABK), MBIA (NYSE:MBI)), the insurers (AIG (NYSE:AIG), Hartford Financial (NYSE: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 (NYSE: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 (NYSE:GE) and Berkshire Hathaway (NYSE:BRK.A) (NYSE: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 (NASDAQ:ADP), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE) and UPS (NYSE: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