Why Every Investor Needs to Follow GE

Posted by admin on July 17, 2007 in Investment Products

(I have hit a 2 week busy period and have not had time to respond to your comments. Thanks for your patience).

GE announced their Q2 results last week and they were impressive; earnings and revenue were both up 12% and the company has enough free cash to increase their share buy-back plan to $14 billion- usually a sign of a healthy company. While GE shareholders (including myself) are happy with the results, all investors should keep an eye on GE. Why? It has been commented by several experts that GE is the proxy or bell-weather stock of the western world (and increasingly the world at large given half of its revenue is made outside the United States). Why?

GE divides its business into 6 segments: finance, infrastructure, healthcare, industrials, money (banking and credit cards as opposed to finance which lends money for customers buy its airplane engines) and NBC Universal. There does not appear to be any major business sector which GE does not operate (GE has energy concerns under the infrastructure line). Thus, its financial results summarize how the economy is performing as a whole.

GE also reported that its infrastructure business segment had a 23% profit growth last quarter which lead all other business sectors. As I have blogged several times, this sector is quickly become the newest industry to be an investor in and GE’s focus on this sector appears to validate the business case for being in this sector (GE has been named in Fortune Magazine as one of the most admired companies in the world several times over so they do know what they are doing). And, of course, GE is doing what people are talking about- being in environmental friendly industries and leaving the subprime mortgages industry.

But here’s the catch- GE’s stock price has lagged the S&P industrial composite. Thus, it appears, in the short term anyways, it is better to follow GE’s business as an indication of investing trends than to buy the stock itself (as usual, please conduct your own due diligence before you invest). Buffet has a large holding in GE which may indicate his confidence in the long-term prospects of the company.

GE’s share price reflects the general stock rule of the “conglomerate discount”- extremely large companies trade at a discount given they are interpreted as too complicated to understand. I have never understand the conglomerate discount rule fully- which has also been applied to companies such as BCE in the past; it seems, in part, to be an admission by the stock analyst community that it has limitations on how it analyzes stock (remember analysts rate companies, they don’t run them and there are many aspects of a business you do not see without operating them) although I also understand that conglomerates also tend to be a jack of all trades and master of none (see the criticism of Citigroup).

Even if you are not interested in GE, it is a good stock to watch since its performance is a fore-shadowing of how your other holdings may perform and general business trends in general.

1 Comment on Why Every Investor Needs to Follow GE

By moneygardener on July 17, 2007 at 9:43 am

Another good reason to follow GE is that they are putting emphasis on buying into growth. Usually any company they buy, or large investment that they make is a bet on an industry, commodity, trend, or geographic area. This may be useful for retail investors to see where large, smart capital is going.