Tuesday, November 14, 2017

GE's fall, the season and the stock

One year ago there was a large position here in GE.  How could this not be a store of value was the thought.  It had challenges, but it also had a large and presumably solid dividend, but with room even for a modest cut if prudence required.  The problems could be solved by a managed restructuring with some asset sales, and spin-offs could benefit a holder.  The upright corporate attention seeker Immelt was on the way out and that would lead to more urgency.  That was the thought.  The lesson --- the market waits for no one.

Giving up about nine months ago, the position was sold in three tranches and was fully gone by the late summer with a modest gain.  Had it not been sold there would have been no gain until some point in the distant future.  One year ago today the stock was at $30.75.  It closed today at $17.90.

The new CEO John Flannery is pure GE.  He does not hesitate to express the need for a break with the past and the necessity of examining core businesses, but he is not a culture changer.  He means well and is surely a smart man.  Right now, he is, without question, surrounded by investment bankers and consultants who want to be part of any securities offerings, spin-offs, restructurings, and asset sales that are certain to come.  It is likely that Flannery needs the outside advice given the strong culture of GE, that strong culture not being a positive anymore.  He must remember that the outside advice is rarely free of cost and conflicts.

Over the last six months, stocks of industrial conglomerates have lagged the S&P by a considerable margin. That GE is part of this composite is a factor but not a dominant one.  With that being a current market inclination, the company has little to support its stock at the moment.  In addition, while GE has always proudly talked about its retail shareholders, in excess 40% of shares outstanding consistently over the last 30 years, the dividend cut could make them weak holders now.  Retail generally does not price stocks, but at the moment everyone is backing away.

GE has some significant businesses, but based on Flannery's team's analysis only around 60% of what they have could be considered core, long term businesses to invest in and grow.  It is difficult for securities analysts and institutions alike to value the stock now.  From this perspective, it could be the perfect opportunity to patiently look for an entry point to an investment in a company that will, in some form, be around for a long time.  There are some exceptional global business franchises within GE today, and getting them at a bargain price is something to look for in the coming weeks or months.  Or next week?


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