General Electric Company (NYSE:GE) may be going nowhere fast. Berkshire Hathaway Inc.’s (NYSE:BRK.A,NYSE:BRK.B) Warren Buffett has famously said that he likes to hold onto stocks forever. But hey, he doesn’t always follow this rule! The Oracle of Omaha recently dumped his GE stock holdings.
Note that this has come after a long decline in GE stock. During the past decade, the return has come to a grueling -36%.
So is this an example of a great investor who made a blunder? Not really. Keep in mind that Buffett’s original investment came during the financial crisis and involved an attractive preferred security. Because of this, he netted a return of over $1 billion.
But Buffett’s sale of the remaining stake is certainly eye-catching. After all, GE stock does look like a classic value play. Consider that the dividend is nearly 4% and the forward price-to-earnings ratio is a reasonable 14X. By comparison, United Technologies Corp. (NYSE:UTX) trades at 16.5X and Honeywell International Inc. (NYSE:HON) sports a multiple of 17.7X.
GE Stock Breakdown
OK then, why the bearishness for GE stock? Why are great investors like Buffett bowing out? Well, for the most part, the big issue is that the company has evolved into a disconnected hodgepodge of businesses, many of which are underwhelming. Of course, this has been the handiwork of CEO Jeff Immelt, who recently stepped down after a tenure of 16 years. GE’s businesses now span categories like manufacturing, healthcare, power generation, lighting, renewable energy, transportation and so on.
See any synergies here? I don’t. Rather, Immelt’s strategy was really about chasing the latest hot areas. But often, this has meant placing expensive wagers at the peak of the market. A notable example of this is the aggressive foray into energy industry, which is now in the form of Baker Hughes Incorporated (NYSE:BHI). Unfortunately, as seen in the latest earnings report for GE, the business continues to be a major drag on the overall performance.
Now there is certainly hope for GE stock. The company’s incoming CEO John Flannery has the right kind of background to get things back into gear. That is, he has a rare blend of operational and deal-making experience. For example, he has run the GE Healthcare business but has also struck key acquisitions, such as $10 billion purchase of Alstom (it was the largest industrial transaction in GE’s history).
Flannery’s deal-making abilities will probably be the most important. GE needs a more focused vision and this means having the willingness to unload more of the segments. This will not only free up resources but give senior managers more time to devote to their businesses.
Yet there is a big-time caveat: turnarounds generally take a few years. And yes, the process can take even longer for complex, global organizations.
Interestingly enough, with Flannery, he began his review of GE in July and the process is not expected to end until November. Of course, this is a clear sign of the challenges he faces.
The Bottom Line on GE Stock
In the meantime, GE continues to post less than inspiring financial results. During the recent quarter, Immelt indicated that the full-year outlook was “trending to the bottom end of the range of $1.60 to $1.70 EPS for the year.” For the past eight consecutive quarters, GE stock has declined on its earnings announcements.
Given all this, it is inevitable that Wall Street will no longer be interested in promises. The focus is now on tangible results. But again, don’t expect anything soon.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.