Is GE a Falling Knife?

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by dvdmovie1

There’s value and there’s value trap.

“It seems that GE is facing administrative issues on their end and each headline just keeps causing the stock to drop.”

GE had nearly 17 years of awful management and rot set in. Their choice of “clean up person” after Immelt’s nearly two decades of awful was an uninspired choice.

Far too many people bought GE because it was down a lot without – IMO – really looking at and appreciating the issues that got them to that point. So many people posted on here about picking bottoms in this and their thesis seemed to be “but it’s GE.” I said a thousand times on here, this was a horribly managed company and when something is that badly managed for that long, it’s difficult to really come back from that. GE’s peers have for the most part spent that time doing well and being well-managed companies. A couple of bad years is bad enough for most companies – GE’s mediocrity under Immelt was allowed to go on for 17 years. Stock was $60 in 2001, $40 by 2007 now in the low teens.

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The other issue that i have is stuff like the enormous and sudden reinsurance write-off from earlier this year. “GE’s North America Life & Health subsidiary is a reinsurance portfolio the company held on to after mostly exiting the business between 2004 and 2006. CEO John Flannery told analysts he had “underappreciated the risk in this book.” My first question then was… what else from the Immelt era got swept under the rug and will come up as a surprise eventually? Why did Flannery so materially underappreciate the risk?

I think strong management is often underappreciated and people don’t appreciate the risk of mediocre/terrible management enough. Reddit’s continual, “but it’s GE!” doesn’t appreciate the effect of Immelt’s tenure and while people have said on here that they are confident in Flannery, as far as I’m concerned there is nothing that I have seen that would provide any evidence as to why. Flannery was there during Immelt’s time, he was there during Welch. He is part of the GE culture that lead to where GE is today. Additionally, after Flannery was announced, the market reacted: as of recently, the stock had lost about half since the announcement.

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The best case for GE is that they apply a lot of financial engineering to the problem and either the eventuality is a break-up or a smaller GE. The smaller GE really isn’t interesting to me. Some of the parts of GE are (the healthcare spin), but I’m not going to own GE to own the spin and if the spin proves less than interesting after research, I’m not going to be upset about not investing in it.

 

Disclaimer: Consult your financial professional before making any investment decision.

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