Thursday, May 4, 2017

General Electric And The Power Of Pessimism

It's been about two years since I last wrote on General Electric (NYSE:GE) and if I had to sum up the performance in that time it would be "blech". With the shares up only about 6%, General Electric has been dusted by Siemens (OTCPK:SIEGY), Illinois Tool Works (NYSE:ITW), 3M (NYSE:MMM), and Honeywell (NYSE:HON). Even Eaton (NYSE:ETN) and Dover (NYSE:DOV), which have had plenty of challenges from weak secular end-market cycles, have managed better performance over that stretch.

I believe there are multiple valid criticisms and concerns regarding GE. The accounting is messy, the adjusted free cash flow generation is quite weak, management accountability seems iffy, and it is hard to trust the strategic vision of a company that has demonstrated an uncanny knack for buying in at the top. The question I have is how well these issues are reflected in the share price and what could move the stock higher. I think the Street has "CEO fatigue" and news of a firm succession plan could provide a pop. I also think GE is poised to benefit from a recovering oil/gas market and reasonable medium-term outlooks for aviation and power generation. I'm not so sold on the company's digital strategy, but I can view that more as a "call option" at this point.

Below $30, I'm tempted. I can't be too comfortable with a situation where I don't really trust management and have concerns about the business mix (to say nothing of its intrinsic cash flow generation capabilities). Even so, I think GE could start to redeem its lost decade and may be worth a look for patient investors.

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General Electric And The Power Of Pessimism

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