General Electric (GE) has felt like a dinosaur for quite some time. The company founded by Thomas Edison in 1892 has moved way beyond—and even past—light bulbs, to become an industrial jack-of-all-trades that hasn’t really mastered any. As a result, GE stock has been getting punished for years. And Warren Buffett has seen enough.
SEC filings revealed that the Oracle of Omaha sold off the 10.6 million remaining shares of GE stock that he owned through his investment company, Berkshire Hathaway (BRK-B). The sell-off occurred in the second quarter, during which GE stock lost more than 9% of its value. Year to date, the stock is down 20%. Since the beginning of 2014, GE stock has scarcely budged—it opened that year at 25, and that’s where it trades today.
When Warren Buffett, the world’s foremost investor, decides he’s washing his hands of a stock, that’s not a good sign for its future prospects.
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Flannery Hire Not Enough to Move GE Stock
Last month, General Electric hired John Flannery as its new CEO, replacing the embattled Jeff Immelt. Flannery said all the right things, vowing improved focus on customers and better execution on cash and margins. But his words failed to breathe life into General Electric stock. The company’s wounds simply run too deep.
Having shed its banking business (GE Capital) and in the midst of selling its signature lighting business, General Electric is in a bit of an identity crisis these days. It wants to be an industrial conglomerate with a focus on tech, but it’s more known for things like aviation, oil and gas and healthcare. And it’s running out of money, with nearly 10 times as much debt ($134 billion) as cash ($14 billion).
The decline in free cash flow has been so steep, in fact, that at least one Deutsche Bank analyst thinks a substantial dividend cut is forthcoming—perhaps by as much as one-third.
General Electric is forecasting modest sales and earnings growth this year, which actually seems a tad optimistic considering it saw declines in both top and bottom lines in the second quarter. But there’s no real obvious catalyst for significant growth going forward.
The fall from grace has been a slow and painful one for GE, which was once one of the market’s most reliable blue chip stocks. It traded as high as 57 before the dot-com bubble burst and was still at 41 a decade ago. Hit hard by the recession, falling as low as 8, GE stock hasn’t even approached pre-recession levels. The apex came last summer, when the stock hit 32. It’s down 22% since then.
So you can see why Warren Buffett wanted out. General Electric is undoubtedly one of the great, most innovative American companies. But its best days are far in the rearview mirror.
What Warren Buffett Does Like
If you still own GE stock and are looking to replace it with something, you could go with one of the two stocks Buffett added to the Berkshire portfolio in the second quarter. Those are Synchrony Financial (SYF), a consumer finance company, and Bank of New York Mellon Corp. (BK). The two financial stocks are up 14% and 12%, respectively, in the last three months—thanks in large part to Buffett’s sizable investments.
Or, if you want other Buffett-worthy value stock recommendations that aren’t in the financial realm, you could subscribe to Cabot Benjamin Graham Value Investor and invest with our own value expert, Roy Ward. Roy’s value stock picks have actually beaten Warren Buffett’s for the last two-plus decades.
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