"General Electric (NYSE: GE) has been under bombardment, with the market fixated on dumping its shares," observes Karim Rahemtulla.
The investment director for Xcelerated Profits Report suggests, "Irrationality reigns." Here, he explains why GE will "still be standing when the dust clears" and why investors should "keep the faith" with these shares.
"We recently proposed that GE should cut it's dividend, and suggested it would bode well for the stock's future.
"And while the stock's longer-term fortunes remain to be seen, GE has indeed cut its dividend, which will save the firm over $9 billion a year in cash to reinvest in the business.
"Investors are looking for fiscal conservatism right now and we think they should reward a company like GE for adopting this philosophy. It just might take some time for that to kick in and for the shares to rally - as we think they will in due course.
"Okay, so it's possible that GE will go bankrupt... but not probable. Doomsayers are ignoring some key facts here, which provide compelling reasons to hold onto GE for the long haul...
"So why are the shares plummeting? The problems lie in its finance arm, GECC. The division is a major lender for everything from aircraft engines to Polish mortgages. Problem is, because GECC is leveraged, any downgrade would cause two things to happen...
The cost of insuring GE debt would increase even with just a notch down in its rating.
Many funds are only chartered to hold AAA securities and are now selling ahead the downgrade. This selling of GE bonds is creating a downdraft in the bond market, which is exacerbating the situation causing a major dislocation in the price of GE bonds and the default swaps associated with them.
"So while I don't agree with the automatic leeriness towards a potential downgrade, I do understand it. Simply put, people are selling GE bonds and that is causing pressure on the shares as well.
"Or put another way: People are selling GE bonds, which is inflicting pressure on the shares. So armed with that knowledge, is GE worth keeping? Here are the questions we need to ask ourselves:
Q: Is GE the same as AIG?
A: The answer is overwhelmingly NO. AIG lost its hat - and its respect - because it made major bets against all type of defaults by selling financial insurance policies without having adequate capital to back up those bets.
"In other words, AIG was just plain stupid. GE, on the other hand, is a much stronger company with smarter management, stronger, higher-quality assets, and less leverage to boot.
"Will it experience defaults in some of its loan portfolio? Well, no company is immune in this market. But its default rate will be much lower because its asset quality is higher.
Q: Will the loss of the AAA rating doom GE forever?
A: Again, this is a no. The loss of the rating will cost GE more money to issue debt, but it will still be a rating that is well above investment grade.
Q: Does GE make money?
A: It makes tons of money. Even its financial arm pulled in billions last year despite the daunting market. But panicked investors are losing sight of the fact that GE has a host of other businesses that pull in huge amounts of cash everyday, all over the world.
"This is a major plus. GE is a big player in infrastructure, energy, aviation and medical technology - and at current prices, we'd argue that investors get a chunk of all those concentrations for practically nothing. But then again, the argument becomes that if there is no company left, nothing is free.
Q: Who owns GE?
A: GE is huge, with over 10 billion shares outstanding and a shareholder roster that includes Warren Buffett (who recently purchased GE equity via preferred convertible shares) and other impressive names.
"GE insiders have also been scooping up shares in recent months. Some paid more than $30 last year and are now averaging their cost lower by buying in the single digits.
"In our view, when the dust clears, GE should still be standing. So while 'ordinary' investors are panicking, the smarter guys are sticking with GE. In fact, they're buying more shares wherever they can.
"Even the hottest short seller of our current times, Jim Chanos, hasn't turned sour on GE yet. He was recently asked if he was 'short' on GE - and his response was a quick and confident 'no.' This from someone who has been on-the-money on a lot of the blow-ups so far.
"GE's future is yet to play out, and nobody can predict what will happen with 100% accuracy. But the company has survived worse times than these. GE's biggest problem today is that nobody trusts anything any more, which leads to the type of panic selling we've seen.
"Investors target certain stocks and drive them to the ground. It's never fun to see any of your holdings go lower, but sometimes you have to read past the panic. This may be one of those times."
The Stock Advisors
www.thestockadvisors.com
The investment director for Xcelerated Profits Report suggests, "Irrationality reigns." Here, he explains why GE will "still be standing when the dust clears" and why investors should "keep the faith" with these shares.
"We recently proposed that GE should cut it's dividend, and suggested it would bode well for the stock's future.
"And while the stock's longer-term fortunes remain to be seen, GE has indeed cut its dividend, which will save the firm over $9 billion a year in cash to reinvest in the business.
"Investors are looking for fiscal conservatism right now and we think they should reward a company like GE for adopting this philosophy. It just might take some time for that to kick in and for the shares to rally - as we think they will in due course.
"Okay, so it's possible that GE will go bankrupt... but not probable. Doomsayers are ignoring some key facts here, which provide compelling reasons to hold onto GE for the long haul...
A strong balance sheet
A strong cash position
A very diversified portfolio
A long history of surviving crisis
"So why are the shares plummeting? The problems lie in its finance arm, GECC. The division is a major lender for everything from aircraft engines to Polish mortgages. Problem is, because GECC is leveraged, any downgrade would cause two things to happen...
The cost of insuring GE debt would increase even with just a notch down in its rating.
Many funds are only chartered to hold AAA securities and are now selling ahead the downgrade. This selling of GE bonds is creating a downdraft in the bond market, which is exacerbating the situation causing a major dislocation in the price of GE bonds and the default swaps associated with them.
"So while I don't agree with the automatic leeriness towards a potential downgrade, I do understand it. Simply put, people are selling GE bonds and that is causing pressure on the shares as well.
"Or put another way: People are selling GE bonds, which is inflicting pressure on the shares. So armed with that knowledge, is GE worth keeping? Here are the questions we need to ask ourselves:
Q: Is GE the same as AIG?
A: The answer is overwhelmingly NO. AIG lost its hat - and its respect - because it made major bets against all type of defaults by selling financial insurance policies without having adequate capital to back up those bets.
"In other words, AIG was just plain stupid. GE, on the other hand, is a much stronger company with smarter management, stronger, higher-quality assets, and less leverage to boot.
"Will it experience defaults in some of its loan portfolio? Well, no company is immune in this market. But its default rate will be much lower because its asset quality is higher.
Q: Will the loss of the AAA rating doom GE forever?
A: Again, this is a no. The loss of the rating will cost GE more money to issue debt, but it will still be a rating that is well above investment grade.
Q: Does GE make money?
A: It makes tons of money. Even its financial arm pulled in billions last year despite the daunting market. But panicked investors are losing sight of the fact that GE has a host of other businesses that pull in huge amounts of cash everyday, all over the world.
"This is a major plus. GE is a big player in infrastructure, energy, aviation and medical technology - and at current prices, we'd argue that investors get a chunk of all those concentrations for practically nothing. But then again, the argument becomes that if there is no company left, nothing is free.
Q: Who owns GE?
A: GE is huge, with over 10 billion shares outstanding and a shareholder roster that includes Warren Buffett (who recently purchased GE equity via preferred convertible shares) and other impressive names.
"GE insiders have also been scooping up shares in recent months. Some paid more than $30 last year and are now averaging their cost lower by buying in the single digits.
"In our view, when the dust clears, GE should still be standing. So while 'ordinary' investors are panicking, the smarter guys are sticking with GE. In fact, they're buying more shares wherever they can.
"Even the hottest short seller of our current times, Jim Chanos, hasn't turned sour on GE yet. He was recently asked if he was 'short' on GE - and his response was a quick and confident 'no.' This from someone who has been on-the-money on a lot of the blow-ups so far.
"GE's future is yet to play out, and nobody can predict what will happen with 100% accuracy. But the company has survived worse times than these. GE's biggest problem today is that nobody trusts anything any more, which leads to the type of panic selling we've seen.
"Investors target certain stocks and drive them to the ground. It's never fun to see any of your holdings go lower, but sometimes you have to read past the panic. This may be one of those times."
The Stock Advisors
www.thestockadvisors.com
