The markets are a mess right now, and General Electric Company (NYSE:GE) is no exception. General Electric stock started the year off hot, but a rather confusing earnings report at the end of January left investors with more questions than answers.
GE also announced an SEC probe into the company’s accounting practices, only adding to the laundry list of investor concerns.
Moreover, once red-hot oil prices are starting to cool off (bad for GE’s oil business), while the markets are in the midst of a massive sell-off thanks to rising rates (bad for GE stock).
Put it all together, and I can understand why investors don’t want to hold onto General Electric stock. Investors are selling equities en masse and, in a big sell-off, the bad apples tend to go first. This is why GE stock is at multi-year lows.
But I remain bullish on GE. This isn’t a near-term play. It’s a long-term play. Here’s why…
Confusing Company, Valuable Assets
The story at GE has remained relatively consistent throughout the past several months.
This is a really big, really confusing industrial conglomerate that operates in an era wherein such companies are essentially extinct. The company no longer has synergies across its multiple businesses, so the benefits of running an industrial conglomerate of such huge scale have been eroded. Meanwhile, the drawbacks, including lack of focus, have been highlighted, as operational mismanagement has allowed for competitors to come in and eat market share in some of the company’s businesses.
Thus, restructuring is necessary. The era of big industrial conglomerate GE is over.
But that doesn’t mean this company is doomed. Just because the conglomerate model doesn’t work, that doesn’t mean GE has no value.
Indeed, GE operates really big and really strong aviation and healthcare businesses. While the power business has struggled recently, both the aviation and healthcare businesses have reported solid revenue growth and strong margin expansion. The outlook for these businesses isn’t too bleak, either. Both are high-moat businesses with enduring value.
Moreover, GE has a burgeoning software business that complements its hardware business. The company’s software platform, Predix, saw order growth of 41% last quarter and revenue growth of 150% last year. Only 8% of the installed base has ordered Predix, so there is tremendous opportunity for GE to leverage its large hardware business to cross-sell software solutions.
Maybe that is why some really smart people are accumulating GE stock at these depressed levels. Four insiders have, together, purchased nearly $56 million worth of GE stock while it has languished under $20. Those insiders include the CEO of GE, the CEO of Loews Corporation (NYSE:L), the CEO of Cognizant Technology Solutions Corp (NASDAQ:CTSH) and the CEO of QUALCOMM, Inc. (NASDAQ:QCOM). Plus, famed investment manager Mario Gabelli said recently that he’s been buying GE stock.
Overall, it’s not all doom and gloom for GE. The power business is tumbling, but the aviation and healthcare businesses have tremendous long-term value. There is a burgeoning software business that could scale quite rapidly alongside the Internet-of-Things (IoT) and some really smart people are buying on this sell-off.
Bottom Line on General Electric Stock
For all of the aforementioned reasons, I think General Electric stock is a “buy now, hold for a few years” type of stock. At just 15 times forward earnings versus a forward multiple of 18 for the S&P 500, GE stock offers investors protection in the event of an equity valuation pullback. I think that means downside risk in the near-term is limited, while upside potential in the long-term is big, thanks to the company’s aviation, healthcare and software businesses.
This combination of mitigated risk and boosted potential makes GE stock a buy. The near-term may be choppy, but patience will be rewarded handsomely.
As of this writing, Luke Lango was long GE.