General Electric Co. (GE) has had and continues to have excellent management that unfortunately continues to create problems for its investors and its own economy. Short term it looks great, but therein lies the problem. Short term is not why we invest; it is, however, why we trade. GE is not a stock to trade! It is clearly not yet back to being the stable and consistent organization it once was, but that may be improving. Some may think that trading and growing from the early part of this decade to 2007 was positive. I disagree, with several caveats.
The over 80% loss in price from $47 in 2000 to $7 in 2009 is inexcusable management and means something was dreadfully wrong. Yes, it has recovered to $21 and is made to look good by Wall Street and the media, but facts are facts. For me, this company continues not to qualify as a quality firm. I need to see a few more positive quarters. Keep in mind that there are other, often smaller, conglomerates that have produced far better investor returns recently and over the past decade. Being married to a company is nearly always costly over the long stretch.
Earning estimates on balance are positive for the near-term, but should be improving at a much stronger pace. How the Street will reward or punish GE or any other company in the future is always questionable. It appears, according to comparative analytics, that the upside is quite limited and that the downside currently has more appeal. The ratio of GE’s price to earnings multiple to its five-year growth rate is negative and below the average of its peers, and that is a concern. My analytics, to a large degree, have to do with comparative analytics. Comparing GE with its peers and other top capitalization/revenue producing companies in general, provides a clear and only modestly positive story.
Timely news includes the fact that projected earnings growth in the near term are looking very good but more recent analysts' opinions are dropping. General Electric executive directors and major shareholders are both buying and selling their stock on balance, which is neither positive or negative. Remember, these guys are super smart about what’s going on.
These big conglomerates and their component companies have always been difficult for investors to profit from. Simple stated, there is too much going on to do accurate analytics. This is likely due to the revenue dynamics that make evaluations tough to figure.
My analytic focus (to invest or not to invest) on any company is most heavily weighted on fundamentals. General Electric appears to have the prospect of improving earnings in the longer term. For me, this is just a warning (something to consider) prior to buying. For prudent investing, those earnings will have to remain strong over a quarter or two (or more) before I would consider it be a wise investment. GE doesn't compare all that well to its major peers. I need to see very good to excellent valuations before recommending an investment. There are many other financial companies that meet my criteria.
Fundamental Valuation Analytics Table (Weighting 40%):
General Electric Compared to Apple (AAPL)
Stock and Symbol | Approx. Current Price | My Target Price % Above (+) / Below (-) Current Price – Valuation is Tweaked One Year Projections From the Next Bullish Inflection Point | PEG | P/E | Forward P/E | Valuation Divergence (%) One Year Projected to a Mean From the Next Bullish Inflection Point |
General Electric , (GE) | 20.9 | + 10 to + 20% | 1.23 | 19.7 | 12.9 | 53% |
Comments: Obviously, this is good valuation and target price projection. It matches/beats Apple quite well, so what is wrong? There is not much with the current fundamentals but a lot with its technical and consensus analysis! This is why it is wise to compare - frequently. This work/analytics is for you to consider possibly taking positions at a future date. However, investing at this time may not be wise. | ||||||
Apple, Inc. (AAPL) | 346 | + 20 to + 40+% | 0.72 | 18.9 | 13.0 | 31% |
Comments: Obviously, this is a very good to excellent valuation and target price projection. When you do further fundamental studies it looks even better. Add to that work, the technical and consensus analysis and you have a conformation that AAPL is and remains a winner. This is why it is wise to compare - frequently. My work/analytics is for your possibly taking positions at a future date. However, investing at this time may not be wise. | ||||||
Additional Related Comments:
In a bull market environment I always compare Apple with companies under consideration for investment. I then do a quantitative rating for my weighted fundamental, technical and consensus analysis. This yields a list of the top five percent of a universe of companies that can compete with Apple for your investment dollar, and Apple is nearly always excellent across the board.
GE Rating: Fundamental: Good, Technical: Very Good, Consensus: Good.
AAPL Rating: Fundamental: Excellent, Technical: Very Good, Consensus: Excellent.
Notes for the above table and for your information:
- Fundamental valuation - Data in today’s marketplace requires me to look carefully at the numbers as being either realistic or creative. That’s because more recently financial analysts are using new/funny math and have changed the criteria on basic valuation. This is producing many valuation data inconsistencies, so I have adopted an additional procedure that I call tweaking the results. This procedure is sometimes needed to get me back to realistic valuations. It requires having an eye on the short- and intermediate-term company price movement, but is definitely not a part of my technical analysis. My valuations also consider the two-year/forward P/E data, but is not weighted heavily. Using this procedure produces very accurate analytics for decisions at bullish and bearish inflection points.
- Most financial analysts determine the price target range by estimating a future earnings per share and then applying a price-to-earnings multiple, also known as the price earnings ratio. I prefer to calculate price targets (high/low) for both the current and next fiscal years by applying the stock's present multiple to the average analyst's estimates and following with some foxy tweaking of the results.
- Further, I believe that there should be just two aspects of fundamental valuation. They are the now and the later, which translates to 1-2 years and more than 3 years but not 10 years. Obviously, the further out we try to project earnings and cash flow, the more inaccurate the data becomes. That is why I do my valuations rather frequently, especially around times of anticipating inflection points.
- PEGs: You will note that some of these companies are carrying high or sometimes negative PEG ratios. I consider the PEGs very important when deciding to take positions in a given security.
Since coming out of retirement in October 2007, I have witnessed a vast change in the valuation practices being offered by many financial analysts. The shenanigans and other accounting practice games were active before, but have now reached a new height of deception. The general public is often lazy about learning, and perhaps naive. The financial analysts know that these characteristics exist and now are taking advantage. It's simple: The average Investor is asking to be told that all is ok, so that is what they are being told.
The graphic below tells the earnings story very well for General Electric and should be studied with a discerning mindset.
(Click to enlarge)
As for the financial statements, all look (“look” can be a deceiving word) very good. However, nothing appears positive or compelling. In summary, the operating income, net income and balance sheet all increased/improved, and appear to be on track.
Technical Thoughts/Analytics (Weighting 35%):
The price activity for General Electric continues to improve since the February 2009 lows at a very fine pace. These numbers (prices) are an important consideration before making an investment decision to buy or short any security. General Electric Co, Inc. price targets are not all that compelling at this time. For a current (up to the minute) chart of GE and AAPL, click here and scroll down.
My current marketplace position is: I am waiting for this current rally to run its course and am focused on identification of the next bearish inflection point. For General Electric, it is pretty much the same story.
Notes for My Technical Work:
- Investing Wisely: This means taking long positions in companies and ETFs that have at or around bullish inflection points and just the opposite at bearish inflection points.
- Trading Wisely: This means taking long positions in high momentum/relative strength companies and ETFs during bullish time frames – on dips and just the opposite during bearish time frames.
Consensus Thoughts/Analytics (Weighting 25%):
Consensus analysis for me is very important. Please note the high percentage weighting I use. There is an old saying: If the Street does not like the company, don’t buy it.
My consensus ranking for General Electric is Good. So for this old bearish fox, I’m very pleased with the fundamental statistics/indicators, love my technical charts and my consensus work is simply right on.
Economic Note
Economically speaking there is always a concern or question as to what the U. S. Federal Reserve Board may or may not do regarding the management of the economy. We do know that rallies have come when the Fed injects capital or fiscal stimulus into the economic system, but that is becoming an old news factor.
We do know that there is a great deal of hype that the economy is improving, but when you explore the numbers over a longer time frame, there is much to be concerned about. How this plays out over the coming few years, for me, is quite problematic.
Conclusion
My focus is “investing wisely,” e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating modern fundamental analytics within these technical cycles means maintaining a process of the thorough and ongoing analysis of many companies and industry groups in my universe. This is a vital discipline in “investing wisely.”
While I believe the general market is in for a meaningful pullback, the prevailing question from most investors is: When? How big and how long will it be? Do I hold my current positions or do I sell? Is there a profitable alternative? The answer will be obviously quite clear when the pullback is over but an old axiom for profitable investing tells us to be prudent in times like this. You might want to remember that cash is always an excellent safe harbor. However, if you are a proactive investor, taking bearish positions may also be wise.
As I mentioned, when “investing wisely,” we must take advantage of the bull/bear cycles as they occur within the overall marketplace. These cycles are both economic and stock market related in nature and must be carefully and frequently analyzed. Within the stock market, you can integrate modern analytics within these “cycles.”
I believe that this discipline provides the necessary clarity regarding the rotation that the economy and almost all sectors, industry groups and companies go through – from favorable times to unfavorable times and perhaps back again. Few investors seem to understand that it's the same for the economy. The world continues to produce an economic “cycle” effect that continues as a process - like life itself.
The trick is to identify prudent securities for buying and for short selling as the marketplace cycles from bull to bear and back again - over and over and over again.
And the good news about the marketplace is that we are presented frequent and conservative/low risk opportunities to invest long, invest short or to simply to hold cash. For me, this is called “investing wisely.”
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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