The Dow Jones lost 4.2% on Thursday, piling on to the worst week for the markets in recent memory. Very few stocks have been immune from the correction including General Electric Company (NYSE:GE). GE stock lost more than 5% on the day and is down almost 8% on the week with Friday trading underway.
My InvestorPlace colleague, Luke Lango, has made a bold call suggesting GE stock is an attractive long-term investment. While I admire his conviction, let me explain why I believe he’s barking up the wrong tree.
Financial Obligations Weigh Large
Veteran investor Jim Rogers recently stated that he thought the next bear market would be the worst he’s seen in his lifetime.
“When we have a bear market again, and we are going to have a bear market again, it will be the worst in our lifetime,” Rogers told Bloomberg in a Feb. 8 phone interview. “Debt is everywhere, and it’s much, much higher now.”
He’s right and while Rogers’ reputation as a permabear does hurt his argument, I’ve been worried about corporate debt for some time.
“Corporate debt — it’s totally out of control, and like with regular Americans when it comes to personal debt, U.S. companies will have difficulties digging out from under this record level of maturing debt,” I wrote in March 2016. “The maturing debt problem suggests it’s time for American corporations to slim down and get their debt under control.”
Two recent statistics from Standard and Poor’s recently reported by the Financial Times’ Gillian Tett should make investors pause to consider the fate of their investments:
“Standard and Poor’s, for example, calculates that global non-financial corporate debt grew by 15 percentage points to 96 per cent of GDP in the past six years, with some 37 per cent of companies deemed to be “highly leveraged”, up from 32 per cent in 2007.”
GE is one of Those Companies
The Economist recently highlighted eight problems with the information the company provides regarding its global operations. According to the magazine, GE’s net debts are 2.6 times its gross operating profits, much higher than its large-cap peers.
Factor into that almost 50% of its assets are intangible in nature; it’s hard to know what General Electric stock is truly worth.
Finally, add to this the reality that General Electric has a $31 billion pension plan deficit — GE owes benefits to more than 600,000 people — which must be considered in the same light as its level of debt, the odds of CEO John Flannery successfully hiving off all seven of the company’s operating units into separately-run, public companies, is slim to none.
Where’s the Value for GE stock?
Last summer, I wrote a piece about GE stock, which focused on the fact Flannery was going to have a really tough time producing above-average returns for shareholders given long-term returns for the markets as a whole weren’t going to be nearly as robust in the future as they’ve been in the past.
Factor in problems that have revealed themselves at GE over the past six months such as the $6.2 billion charge on an old long-term-care insurance portfolio and you have a stock that’s more likely to go to single digits than it is to revisit $20.
The pension plan liability alone is going to be a nightmare for Flannery as he moves to sell off the various pieces of the company.
My colleague sees GE trading at 15 times forward earnings and considers that a value play relative to the S&P 500.
I see a GE stock that has way too many hurdles to jump over before it can start moving higher.
For this reason, I can’t in good conscience recommend GE stock when there are so many better opportunities without any pension plan obligations or excessive levels of debt.
I just can’t.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
