More from this Author
- September 20, 2012
- September 17, 2012
- September 6, 2012
- August 23, 2012
For equity investors with a long time horizon, this summer’s big pullbacks in stocks have created some very exciting investment opportunities. A savvy stock picker should know the best opportunities arise when things are scariest and everyone else is scurrying for the exits.
Now is one of those times.
So you know what I say? Buy. If you have cash available and a time horizon of at least three to five years, then take these uncommon opportunities to capitalize on the market’s disarray and purchase high-quality stocks at excellent discounts. Such a strategy requires a special kind of intestinal fortitude, but I’m also confident this strategy will pay off handsomely — just as it has so many times before. [See: "History Shows it's Time to Put Your Chips on the Table"]
In this case, I think most of the payoff will come when the economy gets back on firmer footing, perhaps as soon as the end of the year. But we could just as easily wind up waiting quite a bit longer for any number of reasons, like the still-ailing housing market, which has been dragging down the economy for several years now and isn’t expected to begin turning around until the middle or end of 2012. [See: "5 Reasons the Market Could Rally Before the Year Ends"]
When a sustainable recovery does occur, I’ll be happy for anyone who owns stock in General Electric (NYSE: GE), which is currently trading around $15.50 per share. In my opinion, there’s no better way to play the coming rebound than by investing in GE. According to analysts, the stock is undervalued by more than 36% and could rise anywhere from 90% to 200% or more by the end of 2016.
To those who follow GE closely, this may seem like a stretch. The company hasn’t been doing very well since the financial crisis, as shown by an annual decline in earnings of 4% for the past five years. The company’s net margin dipped from a peak of 13% in 2006 and 2007 to about 8% in 2010. These results have shown up in the performance of the stock, which has lost nearly 9% annually during the past five years.
I’m not deterred at all, though. GE may well be the best Dow stock to own when the economy recovers — not only because its fortunes so closely mirror those of the economy, but because of what the company has been doing to resume a path of strong growth.
A key strategy has been to shed unprofitable holdings, like a 50% stake in the shipping container leasing firm SeaCo, which was sold for $500 million on August 1. In a far bigger deal that was announced in December 2009 and finally closed on Jan. 29 of this year, GE sold a 51% stake in broadcast network NBC Universal to Comcast Corp. (Nasdaq: CMSCK) for nearly $14 billion. GE retained 49% ownership of NBC Universal but no longer has a say in management.
Of GE’s core businesses, analysts expect the Capital finance unit to be a top source of future earnings because of strong performance in the consumer and commercial lending units. These business segments grew profits 57% and 100%, respectively, in the second quarter — from $637 million to $1 billion in the consumer lending unit and from $312 million to $701 million in the commercial lending unit.
The Energy Infrastructure segment could also boost profits from strong natural gas turbine and wind turbine sales. Sales volume for natural gas turbines should climb by 33% (from 42 to 56), while wind turbine sales should climb 16% (from 1,208 to 1,400) in the second half of 2011 and keep rising solidly in coming years, management says. To expand in the market for valves, specialty piping and other equipment needed to transport oil and gas, GE recently acquired Dresser, Inc. for $3 billion on Feb. 1.
Profits in the Aviation segment have been very respectable recently — climbing 9% in the second quarter from $879 million to $959 million — because rising commercial aircraft engine orders have more than offset declining military demand for aircraft engines. The Transportation unit has been a lot more successful lately, too, growing revenue 74% in the second quarter from $709 million to $1.2 billion on stronger sales of locomotives, engines and related equipment to the railroad, transit and boat/watercraft industries.
Action to Take –> Based on analyst projections for GE, look for annual growth in earnings of 12.5%, which would take earnings from $1.35 per share this year to about $2.45 a share in 2016. Dividends are expected to increase 7.5% annually, going from $0.58 to $0.83 per share in the next five years. Analysts also estimate GE’s net margin will average nearly 15% during that time.
I’m confident the stock will perform as predicted, even though the markets are extremely volatile right now and many investors fear a double-dip recession. Why? We’re talking about GE — a well-known, highly-diversified multinational company with a strong balance sheet, more than $20 billion in cash and the ability to adapt to and dominate virtually every market in which it competes.
The bottom line: GE is up 1,439% since 1981 — a very solid return of 9.3% annually for the past 30 years. What’s more, the stock achieved this through all sorts of economic ups and downs, from the hottest bull market in history to one of the worst recessions on record. Considering where GE is today, I see no reason why now should be any different.
– Tim BeganySource: StreetAuthority
Revealed: Groundbreaking Presentation Could Change The Way You Invest Forever
The video linked below is one of the most important works our firm has ever produced. Research by Michael J. Carr shows how investors could have earned an average annual gain of 21.5% during the past decade... compared to just 7.3% for the S&P 500. Click here to learn how.