Author: Brian Michaud, Split Rock Private Trading
Covestor model: Equity Rotation
Disclosure: Long GE
There are certain companies in this world that have the ability to impact virtually every aspect of human life. From the moment we wake in the morning to the second our eyes close from a tiresome day at the office, one company in particular has been integrated into every part of your day. That company is General Electric (GE).
When you wake up and flick on your light, there is a good chance that light bulb was manufactured by GE. When you wash your dishes in your home, or store goods in your refrigerator, there is a chance those products were created by GE too. Have you even flown in an airplane? GE may very well have built the engines that lifted you into the sky. Have you ever needed to undergo a medical procedure that required an MRI or X-ray? Guess what? GE could have made the devices that made your diagnosis possible.
GE has their hands in an amazing menagerie of different types of businesses. In a recent announcement, GE recently unveiled a partnership with Chesapeake Midstream (CHKM) to begin production and development of a network of consumer natural gas fueling stations in light of the recent increase of oil prices. This announcement adds another level to their natural gas business. One that already includes high efficiency natural gas turbines used to generate electricity. Oh yeah, almost forgot. Have you ever watched “The Office”, “30 Rock”, “Parks and Recreation”, or “The Tonight Show with Jay Leno”? You guessed it. GE produces them too. It is difficult to find a part of everyday life that GE hasn’t been a part of.
This is why we like GE as an addition to our Equity and Commodity Rotation model. We viewed GE as a makeshift “mutual fund” within a pool of equities. It is rare to find a pure equity play with the kind of diversification that GE provides. Aside from their business ventures, GE also boasts traditional fundamental strengths like a 3.55% dividend yield and a P/E ratio of 15.62 (source: Google Finance). However, the aspect that may give GE its biggest strength can also be their biggest weakness for individual investors.
While there are many aspects of GE to like, there are several business arms that an investor may not want to invest in. GE also operates a financial wing titled GE Financial. While we are not particularly fond of financials at this point, we are unable to separate the “bad” business from the good. Unfortunately, we have to take GE as a whole, which may not be desirable for some investors. Nevertheless, GE is an absolutely perfect fit for an investment model focused on equity and commodity rotation.
The Equity and Commodity Rotation model distributed by Split Rock has beaten the S&P by 11.7% as of March 12th. (For more details on the performance of the portfolio go here.) These numbers strongly enforce and support the model’s philosophy.
This is what makes GE such an excellent fit for the model. When buying GE, you are able to participate in virtually every sector of business with one equity position. However, we believe the recent pressure on oil prices coupled with Middle Eastern tension will push the needle on the need for natural gas. GE has positioned themselves for this, and just about every other situation this uncertain economy can dream up.
To make a long and convoluted story just a little bit more clear, GE is everywhere – and they aren’t going anywhere anytime soon.