What's the buzz? Buffet is buying GE!

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Julian Close 03/10/2014

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 diversified tremendously.

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.


Chart courtesy of stockcharts.com

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: GE

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