This American Icon Is A Steal In Today's Overvalued Market

Nick Lanyi's picture

Friday, August 5, 2016 - 12:30pm

by Nick Lanyi

It's been a good couple of weeks for stock market bulls, at least if you follow economic indicators. First, we saw a marked uptick in consumer spending. Next, July business spending remained in expansion territory, despite dipping somewhat from its 16-month high in June. Although the headlines were gloomy -- focusing on the low GDP number for the second quarter -- there's just as much reason to expect an increase in business spending as a decline in the coming months.

That said, with stock prices near all-time highs, investors need to exercise some caution lest they buy overvalued stocks that do nothing despite decent economic performance over the next 12 months. Fortunately, there remain plenty of companies to choose from with solid prospects in the near term and excellent long-term opportunities.

One of these is General Electric (NYSE: GE)

GE is an iconic company with roots in classic American themes: innovation, ingenuity and industry. Its history is storied, and blue chips don't come any bluer. But as I've said before, what's most attractive about the stock is not its past, but its future. GE has restructured its business through spinoffs and acquisitions to again focus on innovation -- and it is now well positioned in some of the fastest-growing areas of the global economy, including infrastructure, transportation, medical equipment and alternative energy.

The latter sector, energy, explains much of the stock's underperformance to the S&P 500 in recent years. GE's energy unit sells heavy equipment for oil and natural gas exploration, which has been depressed due to low energy prices. Energy is the main reason GE's overall sales have dropped about 3% a year over the past three years (excluding asset sales), and the stronger dollar also has hurt exports. In its most recent earnings report, soft orders from energy and the stronger dollar continued to hold back the company, although management has done a good job cutting expenses to maintain profit margins. 

But an energy rebound is more likely than not over the next year -- and even though current results have been depressed by oil and gas, GE's diversification has helped it remain on track. As a leader in wind turbines and solar power equipment, where demand is soaring, GE is enjoying strong growth as orders come in from around the world. GE has mostly exited its consumer financial services business, which was hit hard by the financial crisis, interfered with long-term growth plans and also made the stock complicated to value. GE has retained its financing arm that serves industrial customers; by focusing on its core value-added industrial businesses, GE is expected to improve execution and benefit from its position in fast-growing sectors.

In addition to its catbird-seat position as a supplier of alternative energy equipment, GE also is one of the top producers of more conventional power generation and water treatment equipment -- which is sorely needed in developing economies around the world. It also produces aircraft engines for commercial and military aviation and medical equipment such as CT-scan, X-ray and other high-tech diagnostic machines, as well as equipment used to develop biotechnologies and pharmaceuticals, all of which are set to grow strongly over the next couple of decades. 

And in all of these businesses, GE has focused on making sure it doesn't miss out on the "Internet of Things" wave, in which everyday machines are connected to the Internet and take full advantage of it by using data and interactivity to improve their effectiveness.

Of course, GE also continues to make consumer products -- including its original product, light bulbs, as well as consumer appliances such as refrigerators, washers & dryers and ranges. But this business only accounts for about 7% of the company's revenue; the real growth will be in the industrial and medical areas.

GE generates strong cash flows and is solid financially, with manageable long-term debt. The stock yields nearly 3% at current prices, and its dividend could well rise in the coming years as it has in each of the past six. At recent prices, the stock trades at 17.8 times analysts' consensus estimate for 2017 earnings per share. 

Risks To Consider: GE products are sold predominantly to businesses and are highly dependent on rising capital expenditures. The company thus is vulnerable to downturns in global business cycles, especially in energy, infrastructure and transportation.
    
Action To Take: Buy General Electric under $32.

Editor's Note: In the current economy investors are right to invest in "Forever Stocks." Buy them. Forget about them. Let them make you a fortune. These are the market's most promising, most stable cash cows that are poised for rapid growth in the near future. Discover our list right here...

Nick Lanyi does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.