Skip to Content
Fund Spy

The Light's On, but Where's GE?

GE isn't fitting into fund portfolios as it has historically.

 General Electric's (GE) stock has staged a sharp recovery from historic lows set in March. Some fund managers saw a rare buying opportunity, but not everyone has jumped on the bandwagon. Based on a sampling of recent interviews with portfolio managers, those on the sidelines include well-known names like Bill Miller at  Legg Mason Value (LMVTX) and Robert Goldfarb at  Sequoia (SEQUX). GE no longer exhibits the reliable dividend-paying steady-Eddie profile it has long boasted, so it now has to compete differently for a spot in their portfolios.

Crack Goes the Core Holding
GE has built a legacy for reliable profit growth and operational efficiency and has successfully managed its diverse mix of businesses over time, including its massive financial-services arm, GE Capital. But that legend unraveled when GE posted disappointing earnings in the first quarter of 2008 because of the emerging global credit crisis, which only gathered steam and touched off an avalanche in its stock price. By early March 2009, GE's stock price had declined by more than 75% since that earnings miss in 2008.

The company had pinned its 2008 first quarter earnings miss on GE Capital. This past February, GE ended up cutting its dividend to bolster its balance sheet as the financial-services unit continued to be a thorn in its side. GE stated in March that its total write-offs for its $39.5 billion in real estate loans could add up to $900 million in this global recession.

GE's dividend cut and loan loss provisioning set the debate among fund managers that swirls about the stock today.

Several prominent equity-income funds that rely on GE for its stable dividend became sellers, including  T. Rowe Price Growth & Income (PRGIX) and  American Century Equity Income (TWEIX). Indeed, American Century Equity Income feared GE's deteriorating earnings could affect its dividend rate as far back as the second half of 2008. It has been a seller up until its latest public portfolio dated March 31, 2009, ultimately decreasing its shares to 1.4 million from 11.5 million as of June 30, 2008. Meanwhile, American Funds, a fund family which is known for seeking out companies with reliable dividends, was the top-selling institutional holder of GE in the 2009 first quarter.

Not all prominent funds scoffed at GE and its dividend cut, however.  Dodge & Cox Stock (DODGX) was a buyer during 2009's first quarter. The firm's co-director of research Charles Pohl said in an interview with us earlier this year that GE's dividend cut was the right thing to do because it allowed the company to raise capital and repair its balance sheet, allowing the conglomerate's finance arm to make loans when other lenders are crippled. GE Capital has better opportunities to make money than it has had in a long time, Pohl contended. Morningstar's equity analysts see value in GE, too, rating it 4 stars as of May 20, and continue to think GE has a favorable wide moat separating it from its competitors.

Looking Elsewhere
Other managers we spoke with recognize the strength and opportunity of GE's industrial businesses and freely admit GE's stock could have upside from here, but they are finding other opportunities in the market that may be just as lucrative with less risk. The biggest concern managers voiced was related to GE's commercial real estate portfolio amid expectations for continued deterioration in the value of that asset class. One common argument we heard is that GE is being too optimistic in its write-down estimates and that it may not be provisioning for losses enough.

"While I recognize the underlying strength of the business, I haven't been able to get off the fence and buy more stock," said Robert Kleinschmidt, manager of the  Tocqueville (TOCQX) fund, in an interview. "There are just too many unknowns here, and that's created more uncertainty than usual." He kept the fund's 450,000-share position flat between the 2009 first quarter and 2008 fourth quarter.

Despite the fact that GE disclosed more about its financial-services arm during an investor presentation this past March, famed value shop Sequoia continues to steer clear partly because it thinks the firm's financials are still not transparent enough.

Legg Mason Value's Bill Miller sold his fund's GE stake in the 2008 fourth quarter. GE continued to tank after he sold it, but he saw too many other opportunities to make buying back GE worth it.

"GE is a fine business," Miller said in an interview. "I wouldn't rule out buying GE if it helps my risk-adjusted rate of return. Even though it's a great value, there are better values out there in that they offer better returns on a risk-adjusted basis." Instead, Miller plowed money into insurance provider  Aflac (AFL) and Warren Buffet's favorite bank,  Wells Fargo (WFC), which have risen more than GE off their March lows.

Poking Around at GE's Rivals
In the end, it seems troubles at GE's financial-services unit means managers looking for industrials exposure may seek purer plays. When Miller had thought of adding beat-up industrials, he thought of buying  Ingersoll-Rand (IR) (though he ended up taking a pass and focusing on other sectors). Warren Koontz, at  Loomis Sayles Value (LSGIX), has been nibbling at global industrials like  Siemens (SI) and  ABB (ABB). Koontz said in an interview that he wanted to increase his exposure to an expected infrastructure investment boom abroad while keeping his position in GE flat.

Of course, not all managers are shying away from GE, but it seems it can be no longer assumed to be the core holding it once was.

Harry Milling does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.