No, I’m not punishing myself for failing to post a column last night (although that was very, very bad and your subscription has been extended). Rather, I am advising you that the reason I missed the column is that I was working on the latest update to The Only Investment Guide You’ll Ever Need, which should be out around the end of the year. I’d feel a little rotten if you bought the current edition only to discover it failed to take account of the new tax law, or other breakthroughs in financial technology, and that a new one was right around the corner.
Joe Cherner (who shorted a few shares of GE around 52): ‘Would you rather own all of GE or all of Sony, NEC and Hitachi and have $350 billion left over?’
☞ Can I just have the $350 billion?
GE is a wonderful company, and is likely to be well-run even post-Jack Welch. But Joe makes an interesting point. Should this colossus really be valued at 34 times earnings? Will it be nimble enough to grow its profits at a rate to justify that? A company selling at 34 times earnings is, essentially, providing you with a 3% return. (Right? You are paying $34 for each $1 of earnings, or about $100 for $3 of earnings – a 3% return.) You don’t get 3% on your money; currently, you get a dividend of about 1.4% (minus whatever taxes you have to pay), with the rest of your share of the profits reinvested for you in exciting new ways to make the earnings even bigger in the future (like factories to make more Compact Fluorescent Light bulbs, please). Yesterday, for example, GE reported a 15% jump in quarterly earnings. But the question is . . . and I don’t know the answer . . . how long can GE keep growing at an above-average pace?
If it could keep growing at 15% for the next 100 years, it would be more than a million times as large in 2101 as today, which isn’t impossible for a little hamburger stand with $60,000 in sales – McDonalds could certainly grow to $60 billion in sales by its 100th anniversary – but would be a neat trick for a company like GE with sales, today, of around $130 billion. (They would have to grow to $130 quadrillion, which would be about 400 times the current total gross domestic product of Planet Earth.)
Just how sharply GE’s earnings growth will tail off, or even someday reverse, is beyond our knowing. If earnings keep growing at 15% for the next five years, they will have doubled. So if the stock didn’t budge for five years, it would then be selling at 17 or 18 times earnings and ‘returning’ 6% on the same share price instead of 3%. You would have done better in a Treasury Bond.
The hope of those who are buying today, of course, is that the stock will budge nicely over those five years, as people keep bidding it up, anticipating ever-higher earnings. And they well may. After all, if GE grew at a still healthy 9% a year for the next century, it would only become 5,000 times as large as it is today, not 1 million times. And does anyone doubt GE can do that?
All I know is that GE was a better short at 60, six months ago, or at 52 a few weeks ago (where I, too, shorted a few shares), than it is today, at 46. And that shorting stocks is a loser’s game for most people (me! me! me!). But that Joe is right: GE does still seem pricey.
Quote of the Day
In 1800, 75% of [an American's] working man's expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%.~The Wall Street Journal, September 20, 1996
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