GE (NYSE:GE), a global producer of industrial, household and medical goods, was the largest detractor for the quarter, declining 9%. Shares were weak due to the company’s exposure to energy end markets (which was increased via its merger with Baker Hughes, a contrarian acquisition we believe will prove to be well timed). The stock was also hurt by an analyst downgrade during the quarter, which cited concerns that GE’s cash flows were lagging behind the company’s reported profits. In our view, this concern will prove to be irrelevant to the long-term investment case, as two of GE’s longest cycle businesses (aviation and power) are in the midst of their largest new product launches ever, both of which require large investments in inventory and other working capital accounts that will reverse over time. In addition, GE has recently worked to reinvent its portfolio and possesses a renewed focus on achieving appropriate capital returns. As such, the company completely revamped its variable compensation plan for thousands of employees who are now paid on a number of factors that emphasize improving its return on invested capital. We believe such changes will lead to much better performance and that GE’s long-term outlook, therefore, remains promising.
- From David Herro (Trades, Portfolio) and Bill Nygren (Trades, Portfolio)'s Oakmark Global Select Fund second quarter commentary.
