GE Aerospace (GE)

Industrials have been underperforming and to a large part because they are multinationals. GE looked more attractive when there was more development around the world. Prefers something more domestic. There is no rush to buy machinery and heavy industrials. Rails benefit from the US economy. He prefers that, but has steered clear of this one and the whole sector.

It tends to bottom around the middle of October and then moves higher to the end of December for a two month rest before more strength. Technicals are not that good. A flat trend and below its 20 day moving average. Wait until the middle of October.

He has been disappointed that it has not gained more traction, but he feels they will with their restructuring. They are going back to their industrial roots. He would be patient here.

It represents broadly the US economy. He likes it. It has not been a great performer, but on a 5 year basis, it is going up. This year, it looks like it is trying to build a large symmetrical triangle. He thinks it will break out.

They have a big, growing, energy infrastructure business. They sold off many of their non-traditional assets. They sold part of their financial business. They are trying to reduce financial business to 25% of revenues. They are acquiring energy infrastructure businesses. Their earnings are growing and the dividend is growing. Industrials are going to do well.

She likes this and likes industrials in general a lot, because we are in the midst of a business cycle maturing. In terms of the midterm of the business cycle, industrials do well. That is because business spending picks up.

Industrials had been poor performers this summer. Have underperformed the markets quite aggressively. Chart is showing a series of lower highs, so it is not too favourable over the near-term. Industrials do not perform well over the next 3 weeks. You want to buy industrials more towards the end of October but for this one specifically, from January into April.

Has lagged because of high exposure to financial services. They are slowly deemphasizing them in favour of energy and healthcare. They want to streamline the company to where profit margins and growth are better. Likes it longer term and is keeping it.

General Electric (GE-N) or United Technologies (UTX-N)? In terms of a structured business plan, UTX is a little further ahead. However, for the past 10-15 years, GE has been quietly reorganizing and making good strides. Reducing their exposure to the financial side which cause them so much trouble in 2008. They are also trying to get out of the appliance side. This would leave them as a true industrial. (See Past Picks.)

(A Top Pick Aug 20/13. Up 14.81%.) (See comments under GE-N.)

GE is the economy because they touch so many parts of it, although they are getting out of certain areas. GE has been trending down this year while the DOW has been trending upwards.

General Electric (GE-N) or United Technologies (UTX-N)? This is an extremely well-run company. Even though the stock has performed poorly over the last many years, the new management has really transformed this company making it a more broadly diversified company and less reliant on financial services. He would love to see this pullback because he feels it is a really well-run, well diversified business, with huge free cash flow growth potential and with a healthy dividend. This would be his preference. Wait for a better entry point.

Has been critical of this company over the last several years because they had been given a very high multiple relative to other companies in the sector, for several reasons. They were able to grow by acquisition and made a lot of good ones, but that was really halted when they tried to buy Honeywell. Also, a lot of growth came from GE Capital, which had a very, very high return on equity. That was a very chunky part of the overall business. Have done a good job of restructuring, but you are not going to see the multiple that you saw many years ago. They have also gone into more highly cyclical areas, which makes it less likely that you are going to see multiple expansion. Has a good yield and not very expensive.

This continues to be a work in progress. Everybody was in love with Jack Welsh and what he did with GE, until what he did wasn’t so good. Their big financial exposure in 2008-2009 really hurt the company. To undo this is a long, slow process. He likes the core businesses and that they are trying to lessen their financial exposure. This is a good, long term hold.

This is getting expensive from his Fair Market Value calculations. Has a target of $28-$29, which would carry it up to about 2X Book Value, which is all that the market is going to give you. This is a tired conglomerate. When that happens, the conglomerate starts breaking up and releases all kinds of phenomenal value.