General Electric, or just GE as it is more commonly known, is
one of those giant granddaddy stocks, a part of the Dow Jones
Industrial Average since time immemorial. When I was in my youth,
it was often said of GE that the company wouldn't survive the day
someone invented a long-lasting light bulb filament, but the
company has gone through many changes since those days and has
GE now operates as eight business segments: Power and Water,
Oil and Gas, Energy Management, Aviation, Healthcare,
Transportation, Home and Business Solutions, and GE Capital.
Clearly, the company has diversified so greatly that it can no
longer be described as existing in any one industry (or any two
industries for that matter).
GE is not merely diverse, but with its market cap of $260
billion, it is one of the largest companies in the world. Herein
lies the problem: how do you value a company when you can't
define its center? Well, there are a few things we know for
certain. The bad news is that General Electric has underperformed
the market consistently for about ten years now, having fallen
from $57.81 on a cost adjusted basis from its peak in July of
2000 to a share price of just $26.08 today.
As you might expect, given that performance, the company's
balance sheet isn't in great shape. GE has $656 billion worth of
assets, including $89 billion in cash, much of which came from
the sale of NBC to Comcast in 2013. The company also has $525
billion in liabilities, including $221 billion in long-term debt.
Of course, that may not be a bad thing, as with interest rates
low, the company feels, probably rightly, that it has better
things to spend its money on than the retiring of debt.
One of those things is to continue paying a large dividend,
which, at GE's current price, represents a yield of 3.4%. For an
options trade, that doesn't come directly into play, except as an
indicator of value, which we see in this stock. The dividend also
acts as a cushion, preventing the share price from falling
dramatically (unless times go completely to hell).
Perhaps the best indicator of GE's value is that the Oracle of
Omaha himself, Berkshire Hathaway's Warren Buffet, is a buyer of
the stock at this level. According to Berkshire Hathaway's recent
annual shareholder letter, Buffet added more than 10,500,000
shares of GE this period. Given Buffet's sharp mind, and GE's
tendency to act as a sort of bellwether for the economy when
times are good, we see GE as being almost certain to maintain its
current value (or gain in value) unless there is a broad and
extremely sharp market correction.
I seek to capitalize on this strength with a bull-put credit
spread. Look at the June 22/24 bull-put spread for at least a
$0.20 credit. Use limit orders. This trade has a target return of
11.1% over 103 days, which is an annualized return of 39.4%, (for
comparison purposes only). The stock has to fall 8.2% to cause a
problem. Be aware that this is an aggressive trade, best
undertaken by investors with diverse portfolios and high
tolerance for risk.