GE stock: It's cheap, but it's also a bit risky
— -- Q: Is General Electric stock GE a buy?
A: General Electric is one of those stocks many investors assume you can just buy and forget.
GE, which makes everything from aircraft engines to financial products, is consistently one of the most widely watched stocks by USA TODAY readers. You can find out which stocks readers own or are watching in their USATODAY.com portfolios by going to: readerschoice.usatoday.com. GE has been the No. 1 stock for a long while.
But GE hasn't been such an easy stock to hold during this bear market. Instead of being a source of stability during the financial crisis, it's been punished by investors. Shares of GE are down more than 70% from their 2007 high.
Nevertheless, Warren Buffettinvested in GE last year, when the stock was trading around $24.50 per common share. It's now less than half that.
Does GE's downdraft mean you should be thinking about scooping up shares of the diversified giant?
To find out, I'll put GE's stock through the four tests considered at Ask Matt:
Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading GE's trading history back to 1962, we see the company generated an average annual compound rate of price appreciation of 9.3%. Add in the current dividend yield of 3.5%, and that gets you to an estimated future return of 12.8%. This is better than average; the S&P 500 posted an 8.9% average annual return in the same time frame, says IFA.com.
But here's the rub. If you owned GE, you accepted higher risk — standard deviation — of 26 percentage points. That's nearly double the 15.1 percentage point risk of the S&P 500 during the period. So to get a 44% higher return you accepted 72% higher risk. Not a great tradeoff, since you're not getting a large enough return to justify the higher risk you're taking.
Step 2: Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price to the present value of its expected cash flows. It's a complicated analysis made simple with a system from NewConstructs. When I run GE's stock, I find it's rated "attractive." In other words, the stock is inexpensive relative to the cash the company is expected to generate over its lifetime.
Step 3: Compare the stock's current valuation to its historical range. BetterInvesting's Stock Selection Guide can help. If the company can increase earnings 11% a year the next five years, as analysts expect, that would put the stock in the "buy" range. That's a green light for investors who believe the price-to-earnings ratio will return to historical norms.
Step 4: Check the company's financial health. Before investing in a company, you want to make sure it's in good financial shape. A quick way to check is to check where it falls on USA TODAY Stock Meter, which ranks stocks from conservative (1) to aggressive (5). GE scores an acceptable 2.3 here. You can get a Stock Meter score for almost any stock by going to money.usatoday.com and putting the stock's ticker symbol or name into the Get a Quote box.
Bottom line: There's no question investors are treating GE with more skepticism than they have for decades. GE used to be a stock you'd just buy and forget. But after suffering outsized losses this year, investors are not paying GE the premium they used to.
If you think this downdraft in GE's value is a one-in-a-lifetime opportunity and are comfortable with trying to time the market, you might take a chance. However, if you're looking at GE as a core long-term holding, you might sleep better if you buy a less-risky basket of large-company stocks instead.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz