GE’s Dismemberment Mirrors The Industrial Heartland
Early sixties on I’ve ignored what’s called GDP stocks. Managements, 50 years ago, like General Motors, General Electric, U.S. Steel et al. still remained respected, if not revered. Totally Waspy, in their starched white shirts and double-breasted shark-skin suits.
Heartland industries are managing through disrupting supply chain glitches and turmoil in their labor pools. Topping out of commodity inflation for copper, steel and aluminum will lower future costs of goods sold after an inflation of 100% or more past 18 months.
Commodity plays like Freeport-McMoRan, Alcoa and U.S. Steel now stand as much as 40% below highs made just a couple of months ago. These stocks can jitterbug as much as 10%, intraday. Same goes for oil service paper like Schlumberger and Halliburton. Penalties for being out of sync with stock groups go up ‘n’ up.
I miss old Wall Street, late fifties. At the annual UJA dinner, you were told by Gus Levy of Goldman Sachs to cough up $10,000. Serious money then for many of us. Everyone knew anybody who mattered. Shared best ideas, lunching at NYSE’s buzzing restaurant.
Gabbed about Xerox, Polaroid and IBM, yet technology was just a sliver of S&P 500 sector weightings, no bigger than utilities or financials. Commanding sectors were energy, industrials and consumer staples like Coca-Cola and Procter & Gamble. Revered by the Street for their unassailable compounding of earnings and market share.
In the Great Depression we drank Pepsis. Coke was a nickel but Pepsi, 3 cents for 12 ounces, Coke forever, a 6-ounce bottle. When I looked at a 50-year chart for Coca-Cola I was kinda surprised. Traded under $10 for decades and then sprinted to $40, late nineties. KO (Coca-Cola) plunged to $20 in the bear market of 2001. Took nearly 15 years for its recovery to $40. Then, a great piece of paper, sprinting past $60 past couple of years. Warren Buffett hung in, but from its high, over $40, late nineties, KO is ahead just 50%.
Because of high valuation for internet paper, Buffett missed early entry into Apple, Meta Platforms, and Alphabet. Microsoft traded at $50 in 2016. What shocked me was utterly woeful performance of basic industrials, the heartland, for over half a century. General Electric, for example, topped out around $450 over 20 years ago and now ticks in low sixties, with a classic head-and-shoulders chart pattern. Five years ago, GE ticked over $200.
Jack Welsh, GE’s charismatic headman leveraged the balance sheet, lopped hundreds of thousands off payrolls and repositioned GE, particularly in the insurance sector which went nowhere but allowed him to manage earnings.
Back 50 years, the Street considered GE a polite piece of paper. Sold at a premium to the market, but shoulda sold at a complexity discount after Welsh dug in his nails.
In 2001, GE was numero uno in the S&P 500 with a market capitalization of $416 billion. Nobody else even close to this figure. Microsoft was a distant numero dos at $291 billion and Exxon Mobil in third place. By 2014, GE’s market cap slid down to $262 billion. Past 5 years, GE rested in last place in the Dow Industrials. Since then, the stock has traded down from over $200 into low sixties. Never underestimate how low a tired blue chip can succumb to. GE yields next to nothing so no possible yield support. Upside earnings now measured in dimes, not dollars.
Compare, then, tech’s great 5-year price run. What surprised me was Microsoft outperformed its peers except for Amazon which of late is stalling, and hard to model quarterly numbers.
My takeaway is only go long industrials after the market has nearly destroyed them, say down from highs by at least 60%. Make sure such ragamuffins have wherewithal to stay in business. I did this exercise early in 2021 with Halliburton, Freeport-McMoRan, Alcoa and U.S. Steel. If the S&P 500 bottoms at 15 times earnings, GE and its ilk should sell at 10 to 12 times.
For a confirmed growth stock player, perhaps I’m a little harsh on GE and its ilk. But, GE’s price history, past 50 years says nada por nada. Guys in T-shirts ended up with 10-figures in front of their names. Jack Welsh struck out.