General electric has lost its charge – jerry bowyer f gas regulations r22


GE has been a punishing hold for investors over the past year. Its performance has been in the neighborhood of -50%, while during the same period of time the S&P was up roughly 12%, as was Honeywell, a competitor. And it’s not clear that the troubles are over: the company is under regulatory scrutiny as well as legal action from its own shareholders, and the reserves booked against possible fines place the financial operating unit in a position in which it is barely holding adequate capital to satisfy regulatory requirements. The company had negative earnings last quarter, which is difficult to defend given that most companies have been beating expectations. It has been forced to cut its dividend, and it’s a dividend stock.

At the board level we have the CEO and Chairman roles combined. That makes the CEO accountable to a board that he chairs. In a sense, he’s his own boss. It’s okay to be your own boss when you’re self-employed, when it’s your money that you’re spending. But managers of publicly traded companies are managing somebody else’s money, the shareholders’.

And speaking of the shareholders, there are various little policies which companies can use to impede the oversight which shareholders can exercise over the stewards of their assets. For example, majority voting as opposed to cumulative voting makes it tougher for minority shareholders to get representation on the board. Boards can retain the monopoly power regarding when to amend by-laws. Shareholders can be intimidated when confidential voting is not fully protected. All of these problems existed with GE. In addition, the company has had problems with overboarding, which is woefully common with high prestige companies, which tend to attract high-status, established board members who already bear many responsibilities. Being a board member can become a kind of job for other CEOs and for retired political officials. The problem is that they can sit on too many boards to be effective. A related problem is that ‘professional board members‘ can become dependent on their multiplied board seats for income, which makes them loath to cross swords with management.

We continued the policy of zero-weighting even in the last rebalance despite the fact that the company already had a significantly depressed price by that time. What warning signals did this blue-chip stock synonymous with American business broadcast to alert investors?

As of this past January (as the chart above shows), GE fell quite short in its quality of earnings, particularly faring poorly when it comes to profit in ratio to investments (which can be calculated in various ways). But perhaps more importantly, recent events, an SEC investigation and a probable fine, as well as early retirement of a CEO while under intense criticism, are the sorts of things which it’s important to pay attention to. We’ve found that serious breaches, big scandals, etc. are often foreshadowing future problems. Sometimes problems depress stock values for a short time and then they bounce back. But companies with major potential adverse risk events, like the ones which have been rocking GE in the past year, tend to subsequently underperform companies which do not have these. This implies either that typically not all the bad news is registered in the initial sell-off, or that if the bad news is usually represented right away, the exceptions will have sell-offs of such magnitude as to offset the others. In other words, either there’s usually more bad news coming, or there usually isn’t more bad news coming but the bad news that is coming is really bad.