Monday, February 9, 2009

Is GE A Buy?

Sorry about getting this post out to you late. I wanted to keep you guys updated with what I am buying for my portfolio. Just as I told you guys to sit out the past couple of weeks while earnings came out, I too sat out. And after sitting out for a couple weeks, I am hungry to buy again. I made my first purchase last week on Thursday, buying General Electric at $11 a share. 

So why GE? Well, I think General Electric is one of the best companies out there. They have products that people will always need and they are adapting to the changing economy. As the economy gears more towards new forms of energy, GE has changed its infrastructure business to provide more windmills and conduct research with hydroelectric power. GE also has tremendous business overseas, and believe it or not, GE is still seeing decent orders being placed in by emerging economies for GE's infrastructure tools. GE is also sure to benefit from the stimulus package, considering GE is the leader in alternative energy technology. I think GE is poised to do very well in the future.

Now there has been a lot of talk about GE Capital and what a mess it is. Well it’s not that bad. GE is without a doubt doing better than other banks, and management of GE sees GE Capital making a profit, not a great one, but at least it’s making a profit, in 2009. Yes GE took a hit in its finance arm, but I think that has been discounted into the price already. The credit markets seem to be getting better, I think GE Capital is going to be alright.  Management has done an excellent job turning it around in this economy. Not to mention, the U.S Treasury is unveiling a new plan to help out banks, so investors should rest assured in investing in GE because something is being done to take care of GE Capital's toxic assets.

I also have faith in Jeff Immelt. He is a guy who can deliver on what he says. He has GE moving in the right direction and I like his optimism about handling the dividend while keeping the AAA credit rating. Management is the most important thing for a company, and GE's management has show in its ability to adapt to the economy and run it in an efficient manner.

You also probably heard a lot of talk about the dividend. GE has more than enough cash flow to pay its dividend. They have upwards of $40 Billion in cash and Immelt thinks the best way to allocate that money is in a nice dividend for the shareholders. News of cutting the dividend skyrocketed the stock today, but GE has confirmed it will pay a 31 cent dividend for next quarter and will debate cutting the dividend for the 2nd half of 2009. And even if they cut the dividend, the yield has been around 10-11%, the dividend will still be one of the best yielders out there. NOTE, I said considering, they are not saying for certain they will cut it, just that they are looking into it. If GE's revenue picks up, they can keep the dividend and the AAA rating.

Lastly, I simply think GE is undervalued. When I bought GE at $11, its market cap was around 100 billion dollars, which is absolutely ridiculous considering the size of the company. GE took a HUGE beating for its finance arm, and the price of the share went down way more than it should have. It’s only a matter of time before investors realize GE is unreasonably low, and send the stock higher. GE capital does not even come close to making up the majority of GE's business, and for the stock to have dropped more than 60% is nonsensical.  It’s trading at a PE ratio in the single digits, much cheaper than its competitors.

GE has also shown it is willing to keep its AAA rating, which the market loves. GE's openness to slightly cutting the dividend should give Moody’s enough reason to leave the credit rating at the highest possible.

GE is also a great long term investment. GE is not going anywhere, it’s too big to fail, and its business is too diversified for it to disappear. Your investment is safe with GE, you can't lose it all. Even if GE tanks, the worst that can happen is you have to hold GE for longer than you thought and wait until it comes back up.

I see the stock going back up to around $16-$18 a share in the near term. In my eyes, GE is a buy.

*GE had a huge pop today, it is bound to have a price correction so wait for the stock to pull back a little if you want to buy*

19 comments:

  1. Nice fundamental analysis, VC.

    I think I can offer some interesting perspective as a technical trader, however.

    You may have bought those shares from me. I shorted at 11! Looks like we're making a market here :)

    Here's my reasoning:

    If I want to buy anything, it's something trading near its highs, not GE, which is flirting with single digit territory.

    One could argue that the cheap price tag is a reason to buy, given the huge discount. That may be true, but it's certainly not a very high probability trade, at least from my swing trading perspective.

    Now, you may be right. I might get stopped out here at 13, but I think ultimately it goes lower, even if not in the short term.

    We've seen this pattern over again in stocks that used to be trading up in the stratosphere. As they approach their lows, they start to hit panic mode.

    Last week we started to see the panic as GE threatened to enter single digits. Ideally, I would have taken profits there, but I think this trade could still work as a short.

    Happy trading!
    Adam
    Pimp My Trade

    P.S. - Thanks for the link!

    ReplyDelete
  2. Thanks for the opinion Adam, I enjoy contrasting views because it brings attention to things I may have missed.

    I agree with you that when stocks hit new lows it often stirs panic, but I think GE is a different. Investors were in a panic mode before GE hit its low. It was Moody's decision to evaluate GE's AAA rating that in my opinion caused fear about GE and sent the stock lower. However, with Immelt announcing he is willing to reduce the dividend in the second half of the year in order to make sure GE has enough money to weather this economic storm, the fear is reducing. Which is why you are seeing a huge jump in the stock today. Had the fear of GE come after it hit a low, I think you would be right in that it could go lower, but since the fear was already there before it hit its low, I don't think GE is going to go much lower.

    Also, the fear surrounding GE is around its finance arm. With the treasury announcing its new plan for helping banks this week (hopefully, they seem to enjoy pushing it back), you should see some of that fear around GE Capital disappear as investors can rest assured that something is being done to help GE Capital.

    If GE went into single digits, its market cap would be cut below 100 Billion and the dividend yield would be even more outrageous. At that point I feel like there would be a huge wave of buying, sending the stock back up. It is going to take some pretty bad news to make GE break into single digits because the fear around GE is diminishing. Immelt knows his stock has plummeted and he has shown he is going to do what it takes to make investors feel secure with GE.

    GE made a new low in November and bounced back to 19 within a month, I think the same will happen again. Only time will tell.

    - VC

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  3. One more thing, GE's willingness to cut the dividend should keep the analysts covering GE happy, and we know how much they can impact a stock.

    ReplyDelete
  4. Analysts annoy me...

    They get in the way of nice, clean technical setups. :)

    ReplyDelete
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