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John Dorfman
John Dorfman
Articles (88)  | Author's Website |

Insiders Buy at General Electric, Sell at Wal-Mart

My feelings toward the company are mixed but mostly positive

December 07, 2017 | About:

Insiders have been buying shares at beleaguered General Electric Co. (GE) but selling at Wal-Mart Stores Inc. (NYSE:WMT).

At General Electric, four executives bought shares in November. John Flannery, who became GE’s CEO in August, bought 60,000 shares. That brings his GE holding to 683,026 shares, worth $12.2 million at Dec. 1 prices.

Francisco D’Souza, a director, bought 55,000 shares last month, bringing the value of his GE holdings to $1.63 million. D’Souza is CEO and co-founder of Cognizant Tech Solutions Corp. (NASDAQ:CTSH).

Two other GE executives made smaller buys.

General Electric stock has been mostly in a downward trend for 17 years. It hit $60 a share in 2000, but now sells for less than $18.

My feelings toward the company are mixed but mostly positive. For years, GE reported good profits but a big chunk of them came from its large financial arm, GE Credit, which was hard for me to analyze. So, I never bought the stock.

Industrial Roots

Now, thanks to recently departed CEO Jeffrey Immelt, the company has largely abandoned its lending activities and gone back to its industrial roots – power plants, jet engines, medical equipment, and the like.

Recently it has also gotten into the energy business, taking advantage of that industry’s depression to buy a 62% stake in Baker Hughes at a reasonable price. It’s now called Baker Hughes, a GE Company (NYSE:BHGE).

I like GE’s business mix. But profits in the industrial divisions haven’t been robust lately.

GE reported a return on stockholders’ equity in the past four quarters of 9.3%, which is mediocre. That measure hasn’t poked above 15% (good, by my lights) since 2008 and hasn’t exceeded 20% (excellent) since 2003.

Can Flannery restore luster to the industrial operations? He apparently thinks so, and he is putting his money where his mouth is. I am considering establishing a position in GE, though I don’t have one at present.

Wal-Mart (NYSE:WMT)

At Wal-Mart, earnings have declined three fiscal years in a row. Analysts expect a slight improvement in the fiscal year that ends next month. But insiders aren’t sending a positive signal.

Entities controlled by the Walton family, whose late patriarch Sam Walton founded Wal-Mart, sold more than 11 million shares in a series of November transactions. The family still owns some 1.5 billion shares, or about 51% of the company.

Since Wal-Mart is valued at $288.3 billion, the family stake is worth about $147 billion at Dec. 1 prices.

Given the Waltons’ immense wealth, you could regard the sales of 11 million shares as the mere equivalent of stopping off at the automated teller machine. This particular ATM belched out more than $1 billion in November.

Still, I find it interesting that the family is getting close to owning less than 50% of the shares.

Wall Street analysts are lukewarm on Wal-Mart. They have assigned it fourteen “buy” recommendations, 20 “neutral” ones, and one “sell” rating.

To its credit, Wal-Mart isn’t standing still and letting Amazon.com (AMZN) eat its lunch. But the stock, at 22 times earnings, isn’t exactly cheap. And the growth of free cash flow, once impressive, has turned negative. I’d stay away.

Past Record

This is the 44th column I’ve written since 1997 on insiders’ buys and sells. I have tabulated the one-year results for 34 of them, all those written from 1999 through a year ago. (I can’t find price data for some of the stocks I wrote about in 1997 and 1998.)

The 62 stocks with insider buying that I recommended have beaten the Standard & Poor’s 500 Index by 6.7 percentage points on average, over a 12-month period.

The 20 stocks that showed insider buying but that I said I would avoid have lost an average of 19.4% in 12 months, trailing the S&P 500 by 27.9 percentage points.

The 23 stocks where I noted insider selling have trailed the index, but just barely, by 0.35 percentage point.

All of that is fine, but egg is on my face in two respects. First, there were 10 stocks where I noted insider buying but made no comment, or an ambiguous comment. These have beaten the S&P by an average of 20.4 percentage points.

Second, a year ago I discussed insider selling at Apple. I said that operating earnings at Apple had recently fallen, and that debt had climbed. None of that had any effect on Apple’s stock, which surged 58.1% from Dec. 6, 2016 through Dec. 1, 2017.

Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.

Disclosure: A few of my firm’s clients own Baker Hughes.

John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected]

About the author:

John Dorfman
John Dorfman founded Dorfman Value Investments in 1999. Previously he was a Senior Special Writer for The Wall Street Journal, executive editor of Consumer Reports, and a managing director at Dreman Value Management. His syndicated column appears on Tuesdays on this website and also in the Pittsburgh Tribune Review, Ohio.com, Virginian Pilot, and Omaha World Herald.

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Rrurban premium member - 2 months ago

GE equity and FCF are both trending downward the past several years and the company is definitely a turnaround situation. Given the risk/reward of a successful turnaround and asset value protection, buying closer to book value is preferable. $10-12 might make a good entry point. Thanks for the good article.

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