In December, I did a quick Christmas valuation analysis of
General Electric and concluded that $16 was too much to pay for the
company, given the current market environment and the company's
enterprise multiple.
Since then, GE has given up tens of billions in market
capitalization and just recently bounced off a low of $10.66, a
price that it has not seen in over a decade.
Meanwhile, legends such as Warren Buffett have been caught
buying into GE when it was trading in the mid 20's. Of
course, when Buffett buys stock he gets extra special
incentives. He received an option to buy 3 billion GE at
$22.25 in the next five years and also receives a 10% dividend
(callable within three years). Investors who followed him in,
of course, have gotten a rude awakening - and no special
incentives.
Warren Buffett has taken a hit, but it is just no comparison to
the slaughtering of common investors or even hedge funds who
mistakenly believed in Warren Buffett's extraordinary leadership
position in the stock market.
It's important to note the difference between us and a person
like Warren Buffett when it comes to the stock
market. For Warren Buffett, making a billion or
losing a billion is meaningless for his day to day
life. A billionaire does not need any more
money. And a billionaire can lose a tremendous
amount of money, but is highly unlikely to ever become desperate or
in a survival mode.
It may be time for the myth that is Warren Buffett to be
shaken. Buffett’s father was, of course, a
Congressman and stock broker. Little Warren did
not grow up struggling financially and had no shortage of
connections. His story is not rags to riches, it
is rather upper middle class with many powerful connections –
to riches.
That does not mean what he accomplished was not
extraordinary. We know it to be
amazing. He is the richest man on
Earth. But it may be time to take a closer look
at these differences between us and Warren Buffett.
It is important to also note that Berkshire Hathaway is a
company that is dependent on the Warren Buffett
myth. By that I mean the exaggerated sense of
comfort investors share when it comes to Buffett’s beliefs
and recommendations. There is a financial
incentive to keep the myth alive – that Buffett is an
“oracle.”
But the fact of the matter is Buffett strongly suggested to the
investment community that they should “buy stocks” and
that GE, specifically, was a good investment. He
is a philanthropist, after all. But GE was not a
good investment in the 20’s a few months
ago. That much should be clear by now.
Since Christmas, analyst expectations have dropped to $1.30 and
there is high speculation that the $1.24 dividend will be cut
(except for Warren Buffett’s shares).
Looking at today’s rough enterprise value analysis a buyer of
$11.50 GE stock would be getting $6 of debt, divided by analyst
expectations of $1.30 earnings, leaving a buyer with an
approximately 13.5 enterprise value.
At this point, perhaps the stock is a buy.
Even now, however, it might be prudent to wait for the GE board to
cut the dividend and free up cash flow. Also,
since GE is no longer providing guidance, it may be prudent to wait
for a better bargain. But above all else, it is
an important lesson for investors, a reminder that there is a grand
distinction between Warren Buffett’s financial decisions and
ours.
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