NEW YORK: Investors who have scooped up decimated shares of General Electric Co are willing to wait years to reap a solid return but also hope the U.S. conglomerate will show progress in its turnaround plan and avoid more negative surprises.
GE shares, which traded above US$32 at the end of 2016, sank to US$6.66 late last year, and remain at levels not seen since the financial crisis a decade ago. The stock, an original component of the Dow Jones Industrial Average, was replaced in the blue-chip index last year.
The dramatic plunge has lured investors who see worth in GE's jet-engine, healthcare equipment and power turbine businesses and are confident in new CEO Larry Culp, as shareholders seek to capitalize on the stock's steep slide.
“Based on what we believed the business is worth, it is one of the best investment returns, even on a risk-adjusted basis, that we can find in the large-cap space,” said Gary Lenhoff, chief investment officer at Great Lakes Advisors in Chicago, which Lenhoff said was buying GE shares in the second half of last year and said his timeline was three years.
Even those with long-term investment horizons will keenly watch fourth-quarter results on Thursday. GE is trying to restore profitability at the power division, which manufactures and services turbines. The unit is expected to realize virtually no earnings this year, according to analyst estimates compiled by Refinitiv.
"The actions that need to be taken in the power business – it’s not a quick fix, it’s not something that you can achieve in six months," said Michael Kon, portfolio manager with Golub Group in San Mateo, California. "Usually a turnaround of that magnitude takes a year or two to be complete and you can then start seeing the fruit of it.”
Investors will also watch GE's moves to shore up the balance sheet and reduce debt, including updates on planned asset sales. They hope GE, which booked billions of dollars in charges last year, can avoid negative surprises.
Daniel Babkes, senior research analyst at Pzena Investment Management, said GE's stock price already accounts for some potential negative news, including prolonged struggles for the power business and dour assumptions for liabilities.
Pzena bought GE shares last year, the first time in the value investment firm's more than 20-year history that it has made a significant investment in the company's stock.
"We are in this period of peak uncertainty," Babkes said. "What is particularly attractive about the investment is not just the fact that the path forward can look better, it’s that none of that is priced in."
Graphic: Long road lower for GE shares - https://tmsnrt.rs/2Bar3SD
Several investors expressed enthusiasm for Culp, named GE's chief executive officer on Oct 1 with a compensation package linked to stock price performance. Culp is well-regarded for previously running industrial company Danaher Corp, whose shares soared during his tenure.
"I think people are probably buying Larry rather than buying GE at this point," said Graham Copley, industrials and materials analyst at SSR LLC. "There is an expectation that he can make something better than lemonade out of this lemon.”
GE shares have rebounded more than 30 percent from their low in December. Yet many remain skeptical. GE is saddled with heavy debt, and income-driven investors have likely been chased away after Culp slashed GE's quarterly dividend to a penny a share to preserve cash.
There are serious concerns about the GE Capital lending arm and the power division. GE posted a third-quarter loss of US$22.8 billion, including a massive writedown of goodwill from the power business, mainly from its 2015 acquisition of assets from Alstom.
Granite Investment Advisors plans to play the long game, buying GE shares again after selling some at the end of 2018 for tax purposes, said Scott Schermerhorn, chief investment officer.
Granite believes "fair valuation is about double where it is right now,” Schermerhorn said. “I just think if you own the stock right now and you just ignore it for two years, you’re going to be happy you have it two years from now.”
(Additional reporting by Alwyn Scott; Editing by Alden Bentley and David Gregorio)