GE Earnings Disappoint and Outlook Remains Bleak
The idea with long-term investing in stocks is to see significant price growth. GE stock is down 90% over the last 20 years, and this trend does not look like it will end anytime soon.
Investors love to hold on to stocks over the long term and turn their eyes away from the normal ups and downs that is always part of the journey toward their reaching their ultimate goals. This approach isn’t too bad unless part of your strategy is turning your eyes away from not only the ups and downs but from the entire move as well.
Even with a buy and hold strategy, this does not excuse us from paying attention, and while a lot of these investors would prefer not to have to, we have to at least seek to execute the strategy that we have chosen, and this cannot mean holding stocks that end up failing miserably in achieving the long-term profitability that this strategy seeks.
People think that they can get around this problem simply by diversifying, by holding a lot of stocks where the good ones can help buffer the GEs and the other stocks that they may be holding that have been moving in the wrong direction for a very long time without even much hope of their earning their keep anytime soon.
When we pick our stocks, we presumably don’t just pick them out of a hat, even though with many investors their process of deciding may not be much better, or may even be worse than random if they are looking at beat up stocks and hoping that a wizard will intervene and wave his magic wand at the stock.
We presumably are buying this based upon deeper analysis than just being familiar with the company and knowing how long they have been around and such. We do have people in the industry who spend a lot of time looking at the business of the companies behind these stocks, like Steve Tupa of JPMorgan, and if we’re going to pick stocks for the long term, we do need to rely on at least some sort of analysis, whether we do our own or rely on the work of analysts such as Tupa.
While these analysts really don’t advise on the long-term, and focus mostly on the near-term actually, what is going to happen within the next year, investors who prefer a much longer-term outlook than this can still glean a general sense of where analysts see a company headed beyond their main period of focus, and we can also look at the earnings projections over the next 2 or 3 years to help guide us over the next while.
We do not ever want to try to decide long-term just based upon how far we can see on the horizon though, and since we’re investing for years, we need to look at that period as well, and this involves how much a business and stock can be expected to grow over the long term.
This is one that isn’t given all that much weight by these analysts, but to be fair, they aren’t looking that far down the road, and therefore don’t account for how big of a factor future growth potential plays in the price of a stock, not just in the future but right now as well.
This is where fundamental analysts miss the boat, and if you are just looking at the company’s prospects in the near term you will miss this every time, because this has to do with the long-term, the one that long-term investors are concerned about. The lack of this is the biggest reason why GE stock has lost 90% of its value over the last 20 years, with Apple in comparison seeing its stock grow 95 times over the same time period.
This factor very much plays into a stock’s price right now, where it might go in the future, and accounting for this effect in itself explains the things that people consider mysterious, like why the stock market has rallied so far with the economy in complete shambles or why some stocks have a much higher price to earnings ratios than others. We can understand all this in terms of price to earnings, but the earnings that the market is looking at go well beyond the next few months or couple of years even,
If you put $10,000 in each 20 years ago, your GE stock would be worth about $1,000 today and your Apple stock would be worth almost a million dollars, with it being well over a million before the coronavirus hit. This not only shows us the massive difference in returns that you can get between stocks, it also shows us how important a company’s potential for growth is.
Imagine that we are back in 2000 though and comparing the growth potential of GE and Apple. Apple back then was not the huge company that it is today, but was still very well established and was also on the move, seeing its stock run up over 600% over the past 3 years. GE did pretty well over those 3 years leading up to the tech bubble as well, not matching Apple’s run but almost quadrupling in value and in the midst of a 10-year run that saw their stock’s value rise by over 13 times.
The 1990’s were the glory days for GE, and 2000 marked the end of that era, where they almost touched $60 and now are struggling to stay over $6 a share. Apple broke $3 a share back then and 20 years later broke though $300 a share. What matters isn’t what went on then, it was how much more they could grow relative to their size then.
This is really a tale of two cities, two very different ones, the mega city that GE was back then, which really didn’t have much room to grow from there, versus the hip smaller city that Apple was with a lot of potential to grow into a big city and maybe even a truly mega one.
Being placed back in 2000, this is the question that we needed to be asking if we wanted to decide which city to live in, how much our city can be expected to grow from here, and deciding this should have been very easy if we were looking at the right thing, growth potential.
Focusing on the Future When You Are Investing for the Future is a Good Idea
If we instead look at what the companies were making back then, this would have been a terrible mistake, because Apple had much, much, much more potential to be a lot bigger in 2020 than GE did, even though we may not have envisioned the difference with their stock growth ending up being a thousand-fold.
Both stocks took a huge hit with the crash of 2000, and it took a few years for Apple stock to recover from this, but it did, and how. GE has never recovered from its injuries it suffered back then, and has seen its health decline since, to the point where their stock has not traded this low for almost 30 years.
This comparison is not just about the direction that these two businesses have taken, it is much more about this growth potential that we are talking about, which is still playing out in 2020 where their long-term future outlook still weighs heavily on the matter, where they might be in 2040. This is where the two companies not only have diverged along the way, but diverged tremendously 20 years ago as well. Understanding this one thing is the keys to the kingdom of long-term investing, and is what separates those who chose Apple and have made mind-boggling returns versus those who chose GE and got abused.
We’re back in 2020 now, and we’re going to apply the same principle, and this is a principle that we need to always be applying. As much as Apple has grown, with a market cap now of over a trillion dollars, versus GE’s current market cap of just 58 billion, we still need to be thinking in terms of the growth potential of these stocks going forward.
Apple has saturated its market like a lot of huge companies have, although they still have some real potential for further growth and much more than GE has, who is at this point just trying to bail water and stay afloat with their massive 4:1 debt to equity ratio. Over 2 is a concern, and 4 is double trouble. GE’s business is still on the decline, and growing debt and declining revenues when you are leveraged this much already with debt is not a good combination.
Those who may either be in the stock and hoping for better or looking to buy the bottom of a stock that is even below its 2008 lows from the last recession need to both pay attention to GE’s dismal growth outlook over the longer period and their gasping for air in the present period.
They earn a thumbs down on all timeframes, and investors are really down to hope, and we never want to be down to that because we need to hang our hat on something much more substantial than this and especially not throw it up into the air with the wind blowing against us like this.
We really like Tupa’s insight that this is not about whether GE will survive, which he says is what bondholders would be looking at here, but stock investors are not bondholders. We second his view that investing in a stock should not be seen in isolation like bondholders see bonds, and want to expand on this very important insight a little because it’s one that investors don’t really understand that well.
We’re very confident that Tupa doesn’t mean this in quite the same way that we do, where any stock position needs to be vetted based upon opportunity costs, but that’s understandable because we come at this problem more from the perspective of economics where opportunity cost is the key driver of decisions like this. However, it is certainly refreshing to see an analyst think that way more, even just hinting at this, even though it may have taken a stock with cracks as big as GE has to allow this light to shine through a bit.
In case people were wondering, economics is what all of this is about, and isn’t just some input into stock decision making, how the economy is doing for instance, even though that’s certainly part of it. Economics studies what actually goes on with stock prices, and there not only isn’t a better way to understand them, there isn’t any other good way. People bid stock prices up and down by way of the forces of supply and demand, and the demand for GE has stunk and continues to stink, and that’s all you need to know to decide.
Economics also speaks directly to all decisions that we make that concern the pursuit of utility, whether that be what we invest in, how much money we make, and all the choices that we make that will lead us to be more or less happy in our lives in general. Thinking from this perspective when investing is not a nice to have, at least if we want to achieve better or even make the right decisions.
It is actually pretty amazing that this is missed so much by investors generally, and this is not something that shorter-term investors need to pay attention to more but doesn’t really apply to longer-term investors somehow. We went back in time so far to show you that this sort of thing matters a lot even if you are hoping to hold your stocks for decades.
Opportunity Cost Applies to All Investing Timeframes and Situations
You still need to pay attention to opportunity cost, what different choices lead to, and perhaps even more so with long-term investing, which comes down to looking not only at the outlook of the stocks you are in, but what the outlook may be of competing stocks. Being in the right things isn’t just important, it’s the most important thing, and the only way we can possibly even know what to do and how we are doing.
Whether we may be looking to decide whether to stay in GE right now, and we offer our condolences to those who have held this long-term through all this punishment, or whether to jump in here and hope it goes up, this cannot be a decision that can be made sensibly in isolation.
Sitting right here, right now, we could have our money in GE stock or in any number of other places, including any other stock. If we’re looking to decide whether to have it in GE, it does not matter whether we hold it now or might wish to buy it, as both cash out to the same thing and require the same choice, even though the choice of holding on isn’t quite as transparent and can just be ignored pretty easily if we wish to keep our eyes closed and our brains idling.
It if makes more sense to be in GE right now than all the other reasonable choices, assuming that choosing GE is even reasonable, then this is a good decision, as we have vetted it. We do an absolutely terrible job of this generally, and even though it may make sense for us to hold a number of stocks, we need to make sure that we’re holding the right ones, even though we may wish to focus on the long-term.
GE being a good choice just does not make sense on any term. It certainly cannot come close to competing in the long run, and it’s also ugly over the near term as well. Tupa’s target for this stock is $5, a further drop of 25% from here, but the fact that it the outlook isn’t competitively bullish is where we turn the lights out.
GE CEO Larry Culp may be looking to keep their debt to equity ratio from going over 4, and that’s certainly better than seeing this problem getting worse, but this stock is like an elderly patient in long-term care that just isn’t going to be getting out of bed for quite some time, if ever, and not someone we want to be betting on in a road race.
The three cents a share that GE fell short of analysts’ estimates is only the very tip of this iceberg, and when what little guidance they share tells us that they are going nowhere soon, and the demand for the stock declines even further, they aren’t even the cream in our bottle of milk that has risen to the top, the part we need to focus on, they are sentiment stuck to the bottom of the bottle.
You need to get back to walking before you can run and especially run fast enough to beat the Amazons out there with their world-class speed and world-class future outlook. Seeing GE laying on its back on the track with their tongue hanging out surely cannot be missed unless we are completely blind. We can never just rely on ignorance to guide us, no matter what our investing objectives may be, and this lesson extends far beyond just this very sick stock.
We need to regularly perform examinations on all our investments and ensure that they are not only still aligned with our goals, but also that there isn’t something else out there that is aligned with them better enough to move to the better choice. That’s how we succeed with investing, and how we fail when we do such a poor job at this.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
Contact Andrew: andrew@marketreview.com
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