An eye on GE as Jack bows out
nationalpost.com
A bellwether for the Dow, a proxy for the economy
William Hanley
Financial Post
Spare a thought this morning for John Francis Welch Jr., the Jack of all CEO trades who will leave General Electric Co. on Sept. 7 after 20 stellar years as chairman in which progress of the stock price was his most important product.
In a neat bit of ironical symmetry, GE was a founding member of the Dow Jones industrial average in 1896 and 105 years later is the biggest stock in the Dow and the world, with a market capitalization of US$407-billion. And Jack Welch deserves much of the credit for maintaining GE's pre-eminence.
But with GE shares off almost one-third from the high of US$60.50 hit a year ago next week, will Welch go to his multi-million-dollar book-writing deal and the attendant media celebrity circuit with a sliding stock price greasing the skids under his reputation?
Not only is GE a Dow bellwether, leading and/or tracking the average closely this year, its wide range of businesses and global exposure make it a good proxy for the U.S. economy.
Earnings rose slightly in the second quarter despite a drop in sales. And analysts expect profit to rise about 16% for the entire year, which would be quite an achievement in this soggy economic environment if the estimate holds up.
Yet GE is trading at almost 28 times forward earnings versus about 24 for the Standard & Poor's 500 index. GE is worth a premium to market. But as Jack Welch takes his celebrated leave, we're going to monitor General Electric and what its moves might tell us about the Dow, the market and the economy.
Graham then and now: Constant correspondent John Zemanovich, president of Raven Investment Management Ltd., sent along the following 1975 quote from Benjamin Graham, the father of fundamental equity analysis:
"I refuse to attach a permanence to anything I see around me, including the pessimism I read today in The Wall Street Journal. With my 60 years of experience, I can't say that anything I've witnessed, including two world wars, and the spread of communism, have had any identifiable long-term effect on common stock investments."
Of course, Graham hadn't witnessed the spread of capitalism and the technology bubble and its bursting, but we know what this value investing guru's reaction would have been to the dot-com madness - pretty well the same as that of his student, Warren Buffett. Anyway, Graham was at ground level for the Crash of '29, so we get the point -- but only to a point.
When Graham made his observation in 1975, the collapse of the Nifty Fifty growth stocks had triggered a stubborn bearish market that would not be fully shaken off until 1982. Such episodes might prove happy hunting grounds for disciplined value seekers such as Graham and Buffett. They can be miserable graveyards for the great unwashed who buy overvalued stocks and keep holding on till they finally throw in the towel and sell to people like Graham and Buffett, who are more than happy to relieve them of their burden.
As we ponder where the market is going from here, it's probably useful to remember that the laws of human nature have not been repealed.
Cell, cell, cell: Sentiment appears to have turned fully against Ballard Power Systems Inc. (BLD/TSE), the shares falling $1.10 yesterday to a 30-month low of $33.68.
The timing couldn't be worse for long-time believers in the stock of the emissions-free, profits-free revolutionary fuel-cell technology company. After only 21 years of research and development, Ballard appears to be on the verge of producing truly commercial applications for its technology.
As we noted more than three years ago when the stock price was swept up in the clamour for anything with a tech designation, Ballard was a company in which hot air -- lots of it from analysts -- was converted almost magically into a rising stock price.
The market still values Ballard at more than $3-billion. Would anyone be really surprised if the stock were to follow other tech marvels to far lower levels as people abandon perpetual momentum investing for the delayed gratification delights enjoyed by Ben Graham and Warren Buffett? Besides, momentum works both ways. |
