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Favorite Stock: GE
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November 20, 2001: 12:21 p.m. ET
Wren: Diversity makes it a good play in an economic downturn.
By Staff Writer Parija Bhatnagar
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NEW YORK (CNN/Money) - For the multinational conglomerate powerhouse General Electric, this year has been a quite a roller coaster ride.
First, there was the non-merger with Honeywell that failed to become Jack Welch's swansong. Then the company failed to hit double-digit profit growth for the first time in three years as a result of the Sept. 11 terrorist attacks.
There's growing concern over a slowdown in General Electric's commercial engine unit, its second-largest industrial business. And there's also the $500 million dredging of PCBs from the Hudson River in New York as ordered by the Environmental Protection Agency.
But GE's new CEO Jeffrey Immelt, the inheritor of Welch's legacy, has repeatedly assured investors that he's confident GE will remain a premier company and stock. And he's not just talking the talk.
For example, Immelt made a strategic $2 billion acquisition for NBC -- the company's only media unit -- by buying Spanish-language television network Telemundo. That was despite a turbulent climate for media companies amid a sustained advertising slump.
Scott Wren, equity strategist with AG Edwards, says that even though the company is sensitive to the economic upswings and downturns, its business diversity spreads the risk for the stock, providing a resilience that counterweighs excessive vulnerability in a recessionary environment.
Wren expands on why he favors General Electric as his top stock pick:
Why do you like General Electric?
What draws us to this stock is the consistent ability to grow earnings during all parts of the economic cycle due to the diversity of businesses and ability to execute in different environments.
Who are its competitors, and what makes it a 'winner' in its sector?
It is next to impossible to find competitors who go head-to-head with General Electric (GE: up $0.50 to $41.75, Research, Estimates) across all of its businesses. GE's diversity is a big reason why we are attracted to the company. Diversity, dominance and ability to execute in major lines of business are what make GE a perennial winner.
Two large competitors are Siemens (Germany) and Toshiba (Japan).
GE is in the capital goods sector. Within that sector they are in the electrical equipment industry group. Performance of the capital goods sector YTD (year to date) has been 14.7 percent. The electrical equipment industry group YTD performance has been 18.9 percent. GE has by far the most influence on these cap-weighted sector-industry groups.
What are your expectations for the stock going forward?
GE reported third-quarter earnings that were in-line with our estimates on Oct. 11. We expect GE to be able to grow earnings in the low-to-mid-teens range over the long haul.
What are some of the risks unique to the stock?
The risk that is unique to GE is the retirement of chairman and CEO Jack Welch which took place in September this year. The shares' premium valuation suggests it is imperative that the company's management team, particularly new CEO Jeff Immelt, continue to execute with near perfection.
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Jeffrey Immelt, GE Chairman and CEO. | |
Our estimates would certainly be at risk should a deep, prolonged recession occur. We are currently only expecting a mild, short-lived recession with negative GDP growth in both the third and fourth quarters of 2001.
What is your financial interest in the stock?
I own a number of mutual funds that own GE. I do not own GE outside of mutual funds.
Any final thoughts?
Our final thoughts are this: Had the tragic events of Sept. 11 not occurred, we would have already added more cyclical, economically sensitive stocks to our Focus List portfolio, such as Caterpillar (CAT: down $0.88 to $49.13, Research, Estimates).
Prior to the attacks, underlying economic fundamentals were beginning to show a better environment by the end of 2001. The attacks have probably delayed the economic recovery we were anticipating by two quarters. We are now looking toward the second quarter of 2002 for positive earnings comparisons to appear. Now is the time to buy large-cap quality stocks that are able to grow earnings in excess of the average S&P 500 company in a variety of economic environments like GE and Wal-Mart (WMT: up $0.18 to $55.93, Research, Estimates).
In other words, we want market stalwarts that exhibit growth with some defensive qualities. In recent weeks, the market appears to now be looking beyond the current economic doldrums and realizing that the liquidity the Fed has injected into the system and the low inflationary environment should lead to a much-improved economy by the middle of next year.
We will be purchasing more economically sensitive, cyclical names with the approximately 30 percent cash we have accumulated in our Focus List portfolio over the last six months. We are recommending that investors focus on accumulating diversified portfolios that will be ready to participate in the market (and) economic upswing we anticipate over the next six to 12 months. We do not want to get overly defensive in our portfolio at this point.
Stable to improving consumer confidence is obviously the key driver going forward. 
* Disclaimer
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