Year: 2015

General Electric (GE)

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It has been a while since we took a closer look at General Electric (GE), the 7th most widely-followed stock by Manifest Investing subscribers. The company is anything but a stranger to this community of investors.

It’s also safe to say that it’s been a source of considerable angst and frustration for many of us.

Company Description

General Electric Company is one of the largest & most diversified technology and financial services companies in the world. With products ranging from aircraft engines, power generation, oil and gas production equip., and household appliances to medical imaging, business and consumer financing, and industrial products, it serves customers in more than 100 countries.

Business Model Analysis

Even successful giants are vulnerable to the impact of a deep recession and GE turned out to be no exception. During the 2007-2009 financial crises, GE Capital served as a catalyst that deepened the damage. Because GE Capital was essentially a venture banking enterprise nested within the industrial giant — and accounted for over 50% of revenues — when the financial markets imploded, the impact was fairly severe and maybe even life threatening. That’s the only way to account for a price drop from $42.20 to $5.70 (-86.5%) for this blue chip leader.

Outlook

The Value Line low total return forecast for General Electric is now 13% — as the long-term low price forecast was bumped from $30 to $35 in the current update.

Analysts appear to be optimistic about the Alstom acquisition and fairly certain that the global condition will ultimately improve. Infrastructure matters. This urgently includes the United States as the electrical system condition is well on its way to resembling those bumpy pothole-ridden atrocities we used to call roads. The only difference is that when the electricity system fails — it takes a lot of critical stuff with it. General Electric is crucial to restoring the necessary reliability of our electrical supply.

“We like this blue chip from a number of perspectives. The year ahead will probably only bring returns in line with the overall market; however, out to 2017-2019 we think this equity has room to run. Too, with the dividend north of 3%, income investors have a strong play here.” — Value Line (1/16/2015)

The growth forecast is based on emphasizing the last 2-3 years of actual data in combination with the Value Line forecasts. This industrial giant is retooling, exiting a few businesses while bolstering others. The Alstom addition is an example. For this reason, we focus on the right hand side of the business model trends — and find 4-5% top line growth feasible.

Value Line has a 3-5 year projected net margin of 15.3% and this is a big part of the 14.7% total return forecast for the analyst section of the study. While achievable, we’d be more comfortable with a profitability forecast in the 12-13% range based on the historical profile.

A projected average P/E ratio of 15.0x for a blue chip leader is solid.

General Electric’s exposure to capital-intensive industries makes for a rough road during corrections and recessions. Bringing home an EPS stability of 76 is quite an achievement. The “dent” made in the company the 2008-2009 recession manifests in the Financial Strength rating. (It used to be higher) Overall, General Electric still ranks in the top 10th percentile of all companies when it comes to quality — and we’d be unsurprised to see the overall quality rating increase in years ahead.

It’s been a bumpy road. (Understatement alert) But business results have been steadily improving. 2015 may be yet another flat spot in the stock price trend if oil prices continue to fall — and global recessionary conditions persist.

Ge chart 20150115

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Dipped In Magic Waters of Technology

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Dipped In The Magic Waters of Technology

With certain apologies to Field of Dreams and Terence Mann (James Earl Jones)

Terence Mann: People will come. They’ll come to Las Vegas for reasons they can’t even dream (yet). They’ll land at McCarran not knowing for sure why they’re doing it. They’ll arrive at the Convention Center as innocent as children, in a childish (but pure) quest. It is money they have and solutions they seek. They’ll wander and discover. They’ll find geeks and gizmos and remember days before the Star Trek stuff started taking shape and forming reality. They’ll cheer their heroes. It’ll be as if they dipped themselves in magic waters. The memories and dreams will be so thick they’ll have to brush them away from their faces. People will come. The one constant through all the years has been technology. America has rolled by like an army of steamrollers fueled by the next generation of locomotive engine. Technology has transformed time. It’s a part of our past — and a glimpse of our future. It reminds of us of all that once was good and things yet to come. People will come. People will most definitely come.

For those less familiar, this week is the Consumer Electronics Show in Las Vegas. It is the world’s largest trade show of its kind. The International CES (Consumer Electronics Show®) is the world’s gathering place for all who thrive on the business of consumer technologies. It’s where business gets done: on the show floor, in and around our conference program, in impromptu connections and in planned meetings and special events. Follow on Twitter via #CES2015.

We’ll be covering the show and providing investment-related feedback on a number of companies, including but not limited to: QUALCOMM (QCOM), Masimo (MASI), 3D Systems (DDD) and many more …

Coming Events and Attractions

Our expanded coverage of the update stocks this month continues as part of our quarter long test drive of this feature and the studies and shared ideas it delivers. Please tell us what you think and feel free to join in the Forum discussions for the deeper dives on some of the stocks.

We’re working to schedule the January Round Table. It will likely be on Saturday morning, January 31 at 10:30 AM ET. The January Round Table will be part of a series of webcasts during Groundhog Weekend — more information to follow.

Speaking of our 10-year anniversary and ALL THINGS GROUNDHOG, we’ll be firing up another year of superior stock selection as we launch Groundhog Challenge 2015 on February 2, 2015. It’s not too early to start thinking about your winners for 2015. Remember we welcome both individual investors and groups (investment clubs) … the ground rules are simple pick a minimum of FIVE and a maximum of TWENTY investments and we lock them in from 2/2/2015 through 2/2/2016.

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 5.0% — a little higher than we’ve seen in the last few weeks.

Fundamentals continue to erode slightly. This update did have a slight exception, with modest boosts to expectations for companies like Bristol-Myers (BMY), Lilly (LLY), Merck (MRK) and Teva Pharma (TEVA) along with various other drug-related stocks. Pfizer (PFE) was a notable exception — with a slightly reduced long-term forecast.

Materially Stronger: Abbvie (ABBV), Lilly Eli (LLY)

Materially Weaker: Cameco (CCJ), Genworth Financial (GNW), Pan American Silver (PAAS), Barrick Gold (ABX)

Pfizer (PFE) dropped from $35 to $30 for the 3-5 year low price forecast.

Teva Pharma (TEVA) went from $55 to $60 for the 3-5 year low price forecast.

Standard Coverage Initiated:

Discontinued:

Stocks to Study

The following update stocks are ranked in the top 10th percentile of all companies we follow (MANIFEST Rank > 90)

Season For Shareholder Loyalty

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It’s absolutely a beautiful thing when we engage friends and family and lead them to the discovery of long-term investing. The opportunity to make a substantial difference, enabling better futures, is massive. We know that long-term investors also often become loyal (even rabid) consumers for the companies that they own. Regular vigilance combines with routine consumption. I wish I could change the names in the following story to protect the guilty … but it serves as a reminder of how powerful these forces of discovery can be.

I’d made the sojourn again from southeastern Michigan back to the shores of the Mississippi River in northwestern Illinois. As a fairly frequent traveler, my bags are generally packed carefully to make sure that I have all of the necessities for effective travel. I’d arrived back at my parent’s residence well after midnight and settled in for a good night’s sleep knowing that I’d see them at the breakfast table in the morning.

Sunrise came … but something was wrong. It was one of those gnawing feelings. I could have sworn that I stuck that tube of toothpaste in my overnight bag. No matter how deep I dug, it was clear that I was on the road without this necessary item? But my toothbrush was there? If it was there, how in the world did I forget the tube of toothpaste?

Sure enough, Mom and Dad were already seated at the kitchen table. We exchanged hugs and greetings and my instincts began to kick in.

“Dad, you wouldn’t have any idea why I can’t find my toothpaste, would you?”

Grinning, as he often does, like a Cheshire Cat but with his face aimed at his cereal, he responded, “Hmmm. That’s too bad, sorry to hear that. I probably have some real toothpaste you can use.” He was now snickering and giggling while continuing to munch on his cereal. He was also clearly avoiding eye contact.

“What’s with the Annual Report standing next to the bathroom mirror?”

Mom mumbled something along the lines of, “… Oh no. Here we go again.” The cereal crunching continued, but he offered up, “You’ve been warned.” There was still no eye contact.

“Enlighten me, Dad. I don’t seem to recall any warnings?” (It was a white lie. Hairs were now standing on the back of my neck and I was clearly in the danger zone.)

“You should know better than to bring that contraband into this house.”

Mischievous giggling continued. Mom was now grinning, siding with the suspect.

“Why don’t you join the rest of the world and use Colgate ($CL) toothpaste instead of that ‘stuff’ ($PG) from Cincinnati? Would you like to see a Fact Sheet?”

It was crystal clear now. My toothpaste had been hijacked and replaced with a Colgate-Palmolive annual report. Dad became a Colgate stakeholder after seeing a company presentation at an investment conference a few years ago. It seems he also became an ardent evangelist and enforcer for their products.

Crossing Wall Street Challenge (2015)

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Eddy didn’t get quite enough “Christmas Miracle” to extend his 7-year winning streak of beating the S&P 500 with his Buy List. But it was close. The 2014 Buy List landed at 11.8% for the year versus 13.7% for the S&P 500. Not exactly a disaster. And more importantly, his 9-year (since inception) absolute return is 10.8% vs. 8.0% — a relative return of +2.8%.

Nothing wrong with that.

You can find commentary (and continuous updates) on Eddy’s selections for 2015 here and here.

Start Your (2015) Engines!

We’ll track the 2015 Challenge on the customary dashboards:

Shopping In The Best Places With Our Friends

Walking Main Street is our entrant in this Challenge. Walking Main Street 2014 closed out the year on 12/31/2014 at a portfolio value of $1,175,729.94 — for an annual total return of 17.6% — outpacing the S&P 500 by +3.9%.

Where did we go hunting for our (20) stocks for 2015? Like we said, we like to shop in the same places as our like-minded long term investors. Therefore, we start with the MANIFEST 40, the forty most widely-followed stocks by Manifest Investing subscribers. We sort that by MANIFEST Rank, our combination ranking that includes a dash of return forecast and a dash of quality for a recipe that recognizes the top two characteristics for any investment. We also want to stick to stocks in the top quintile (MANIFEST Rank > 80) as we build for 2015. This yields about (24) stocks.

We then turn to lessons we learn from friends. In this case the inspiration comes from our two-time defending Group Champions in our annual Groundhog stock picking challenge — the Broad Assets investment club of St. Louis.

Why? Because they (and we) believe that stock prices follow earnings. We’ve added the year-over-year change to our shopping list, shown on the accompanying chart as “2015 EPS Delta”. This is nothing more complicated than comparing the analyst estimates for 2015 versus the year-end results for 2014.

Doing this disqualifies companies like Qualcomm (QCOM), Microsoft (MSFT), Coach (COH) and Exxon Mobil (XOM). These are all excellent companies that may have a turbulent year ahead of them. For a typical/traditional long term portfolio we’d look the other way, but this is a one year contest. We believe that stock prices ultimately follow earnings and we also believe/know that the rhinos often overreact to short-term turbulence, in many cases punishing stock prices over the coming year if they believe earnings are cloudy or in jeopardy.

The average 2015 EPS Delta is 12.9% for our universe of stocks.

In that spirit, we went looking “outside” the MANIFEST 40 for a few stocks to substitute for the disqualified ones. We found a group of stocks with solid return forecasts and quality that have good or above-average 2015 EPS Delta expectations: Fossil (FOSL), Mesa Labs (MLAB), Priceline (PCLN) and MSC Industrial (MSM).

After adding these, the overall 2015 EPS Delta for our (20) stocks is 14.3%.

A few stocks were disqualified with return forecasts too close to (or less than) the median return forecast (MIPAR) of 6%. The companies included in this batch were: FactSet Research (FDS), Johnson & Johnson (JNJ), CVS Health (CVS) and Costco Wholesale (COST). Again … nothing wrong with any of these … but we’re looking for outsized return forecasts.

Copa Holdings (CPA) merits a look with the news about Cuba … and T. Rowe Price (TROW) checked in with a very honorable mention.