In one of his early books, Peter Lynch, famed manager of the Fidelity Magellan Fund (during the time when that fund had the strongest record among domestic growth funds), wrote that no one ever gets fired for buying IBM.
That is to say, many run-of-the-mill portfolio managers will stick with “safe” high-client-recognition large cap names long past their sell-by dates. Why? …because they think there’s less career risk for them in doing so than there is in holding earlier stage names where there’s much more upside but a bigger chance of going down in flames. In my experience, that risk comes less from the company itself than from the PM’s not doing the continual securities analysis needed to monitor a smaller firm’s prospects.
The “safe” strategy, according to Lynch, generates at best mediocrity.
GE is a fascinating case (of the train wreck genre) in point.
As I see it, the company grew by only about 10% a year in what one might call its last “glory days” in the 1990s. That lackluster performance was fueled in large part by the creation of a finance division that specialized in lending to less than pristine customers. On a stand-alone basis, the earnings from such a business typically garner only a substantially below-market multiple. But it seems to me that GE boosters, led on by cheerleader CEO Jack Welch, never connected the dots and continued to pay super-generously for these results.
Welch’s successor had the unenviable task of straightening out the lumpy, aging conglomerate he left behind. New management wound down the risky finance operations, but then decided to bet the farm on the consensus view at the turn of the century that the world faces a structural shortage of oil. Ouch.
I have no current interest in GE as a stock. My hunch, however, is that if I looked into the company I’d end up being more a buyer than a seller. That’s for no other reason than it has been a dismal operating performer for a quarter century and there must be something of value inside a stock that has been beaten down so much over the past decade plus.
What prompted me to write this post, then?
dead cross and golden cross
I saw an article about GE by a technical analyst who asserts the stock is flirting with disaster. His argument is that a short-term moving average of GE’s stock price is just about to break below its long-term moving average. Technicians call this a “dead cross,” a sign that investors are abandoning hope and will likely begin to dump the stock out without regard to price.
I have no belief in most technical indicators, including this one. I like the name, though. And if this prediction proves correct, I think it would provide a very good buying opportunity.
The opposite of the dead cross, by the way, is the “golden cross,” where the short-term moving average breaks above the long-term moving average. This supposedly leads to strong buying action.