Many companies grow and expand by acquisition and become conglomerates over the years with many divisions. They offer investors exposure to many different segments of the economy. When the economy is booming, conglomerates with a heavy industrial exposure can be leading stocks as commercial building, infrastructure and other projects use products and services from several divisions. When economic growth is just slogging along — as it is now — those conglomerates with substantial exposure to the retail consumer and financial services industry can see strong cash flows as consumers continue to spend on basic needs and low rates boost financial companies.
Fortunately we have Portfolio Grader to help us sort the good conglomerates from the bad — and determine which businesses are benefiting from the current economic cycle.
General Electric (GE), for example, is one of the largest conglomerates in the world. The company has divisions that operate in technology, financial services, construction, aircraft and appliances — but the water, energy and aerospace divisions drive much of the profits at General Electric. While the financial services division is almost one-third of revenues and profits, it has not been strong enough to offset weakness in the more industrial parts of the business.
GE is an enormous business with almost $150 billion in revenues. A company this large with enormous industrial exposure needs a robust economy to post the type of earnings growth and momentum needed to be a best-of-the-best type of investment opportunity that we prefer. With the economy just muddling along right now, GE is doing OK … but not great. This tepid outlook is reflected in the company grade in Portfolio Grader. The stock is rated “C,” or “hold” by the stock-ranking service. The stock, like the economy, is OK but not particularly exciting.
Compare that to a conglomerate that gets most of its revenues from the insurance business but also owns utilities and railroads. The company also makes candy, shoes and manufactured homes … and is also in the newspaper and fractional jet ownership business. On top of all that it’s now going into the food business by partnering up to buy into one of the best brands in the business.
Yes, we’re talking about Warren Buffett’s Berkshire Hathaway (BRK.B).
The company derives most of its income form insurance, financial services and consumer products of one type or another. Because of its excellent performance and lack of exposure to industrial markets, the company has been generating enormous cash flow and has habitually exceeded expectations. On the heels of its most recent earnings release, the stock was upgraded by Portfolio Grader — the stock is now rated “A” and is a “strong buy.”
When the economy is hitting on all cylinders, large conglomerates with heavy industrial exposure may well steal the spotlight. For now though, it’s those with large consumer and financial exposure that should be in investor’s portfolio. Track the rankings of these companies in Portfolio Grader and you will get plenty of warning when this tide changes.
Louis Navellier is the editor of Blue Chip Growth.