The news of the morning is General Electric. The company’s earnings came out and missed expectations by about 7 cents on the bottom line and a billion or so on the top line. General Electric in many respects is like the S&P 500 itself given their large portfolio of companies from a broad spectrum of industries. The major source of the shortfall was from their financial services division which, by my recollection, may have accounted for as much as 40% of the company’s earnings power, at least in recent years. Anytime you buy a piece of equipment for the home or work on a zero interest basis, chances are likely that GE may provide the vendor financing.
General Electric is a great, fabulously well-managed company. While we don’t own the stock, it is shocking to see such a large company that rarely makes big moves be down 12% on a single day as is the case today. Folks on CNBC were just mentioning yesterday that the company’s stock had barely moved in five years, making today’s move seem even more unbelievable. On closer inspection, however, the stock has had a very big short term move, rising from $31 at the beginning of March to $39 at the beginning of April, a 25% spike. While the S&P 500 has been up over the last couple of weeks too, it hasn’t gained that much, suggesting that investors may have been flocking to the “safety” of something larger and bigger in recent weeks.
So, why don’t we own GE? Aside from the issue of dumb luck and just being too big, the fundamental reason has largely been their exposure to the financial services sector. In our own portfolio, we’ve actively chosen to stay underweight the area. Owning GE — an S&P 500 like company with an even greater exposure to financial services — would be inconsistent with our own top down views. (At least that’s how we think about it.)
Having said all that, would-be investors are getting a chance to buy the stock back at its March lows, risk levels that might be more consistent with an economy in recession. While we are not buying GE today, it would be worth knowing the nature of the lowered earnings guidance.
When I bought my new zero turn Cub Cadet a year ago, I accepted the one year free financing deal, knowing that I would pay it off in full before the anniversary date and save the interest costs. Having never taken advantage of “free” money deals in the past, I took this one only because of the size of the financing. While new to the process, I was a bit surprised at how quickly and easily I qualified for the ample line of credit.
Could GE have a subprime lending issue on their books? While I tend to doubt it, I’d still want to ask the question. Free, after all, is usually too good to be true.
