The market is underestimating this company. Here’s why you shouldn’t! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder, The Independent Minds speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
We’re thrilled to share with you another investing insight in today’s “The Independent Investor.”
Every Wednesday, we publish articles about investing because we want to help you achieve true financial freedom through wealth creation.
In this article, we’ll talk about one of the U.S.’ most recognizable companies.
Continue reading below to know why you shouldn’t simply rely on market sentiment when buying stocks.
The Independent Investor
General Electric (GE) has been existing for 131 years and continues to be one of the most recognizable companies in the world.
Co-founded by Thomas Edison in 1892, the firm became synonymous with innovation for the first several decades of its existence, and became a household name because it sold products like the incandescent lightbulb, X-ray machine, home television, and electric stove.
Aside from mass producing electric appliances, GE developed products for military use such as radar tracking systems and jet engines. The firm also pioneered laser technology and medical imaging in the 1960s and 1970s.
Due to GE’s foothold in various industrial sectors, it became one of the U.S.’ leading corporations.
This dominance went on for nearly a century until things changed in the 1980s…
Jack Welch took over as GE’s CEO in 1981. From that year until 2000, GE, under Welch’s leadership, built businesses across all kinds of industries including aviation, financial services, and even media.
As a result of this strategic pivot, GE became one of the biggest conglomerates in the world. In fact, the firm’s market capitalization peaked at about USD 451 billion in 1999.
While the results of the strategic shift may have been a positive development, over time, the firm grew sooooo BIG and diversified that its size became a burden… not an advantage.
GE’s new management realized this not long after Welch’s retirement in 2001. Ever since he stepped away from the firm, the conglomerate’s stock price fell by more than 60%.
Data point from Altimetry
The new leadership spent years solving this problem, ultimately realizing the firm’s businesses just don’t mesh well together.
In 2021, the conglomerate announced its plans to split itself into 3 separate public companies in the following sectors: Healthcare, aviation, and renewable energy.
As of June 2023, the corporation has completed the spin-off of its healthcare business.
Despite GE’s shift in business strategy, the market expects the company’s Uniform return on assets (ROA) to steadily decrease beginning in 2025 as seen in the chart below.
Data point from Altimetry
It’s clear the market doesn’t think much of GE… but that doesn’t mean as an investor, you should adopt that view too.
The market hasn’t caught on to the fact that GE is poised to rake in stronger-than-expected returns in one of its key businesses—aviation.
Demand in the aviation sector is at the highest it’s been in both defense and travel segments in years.
Due to geopolitical tensions, the U.S. government and its allies are ramping up defense spending.
On the other hand, travel is surging as the world continues to move on from the COVID-19 pandemic. This means plane makers like Boeing and Airbus will need to produce aircraft as fast as possible to keep up with the demand.
In this scenario, GE stands to benefit since it sells the engines used by both travel and military aircraft. It’s no wonder the firm recently focused its operations on aviation.
… and since the market is currently underestimating GE’s potential earning power, savvy investors are in a good position to buy the firm’s stock at lower prices.
As we’ve discussed with GE’s example above, investors cannot solely rely on market sentiment when picking stocks. It’s important to get a full picture of a firm’s operations to determine whether it’s worth investing in or not.
Keep this insight in mind the next time you plan to invest in a particular stock!
Remember: By doing your due diligence instead of following market sentiments, you’ll be able to take advantage of opportunities that will help you earn better returns.
(This article is from Business Builder, The Independent Minds, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Head of Marketing
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