By Rick Aristotle Munarriz (TMF Edible)

GE fascinates my friend Paul. GE's valuation is what fascinates me. He thinks a mature company that generates $12 billion in annual profits deserves a $500 billion market cap -- to say nothing of the $200 billion in debt.

Let's put it this way. If I asked you for a five-dollar bill, and asked you to write me an IOU for another two bucks above that -- and all I promised you was twelve cents next year in return -- would you do it?

I hope not. Granted, it's not as easy as that. GE is not as easy as that. It's a complicated conglomerate facing the corporate mortality of the one man who has mastered the company over the past few decades.

But what's interesting here is that Paul raised a lot of good bearish points, only he never got around to telling the complete story. There's downside to a lot of his GE polish.

Yes, Paul, GE is the sole survivor of the original Dow Industrials. But that only goes to show how days are numbered for even the largest and most admired companies.

Yes, Paul, the company has increased its dividend for 25 consecutive years. But what better proof is there of the stock's overvaluation than to consider that factor -- and that the company is paying out nearly half of its annual profits as dividends -- yet its yield is a paltry 1.0%?

Yes, Paul, GE's stated goal is to be the No. 1 or No. 2 company in each of the markets it enters, but can't the same be said of our once-beloved Amazon.com (Nasdaq: AMZN). And, yikes, didn't NBC just slip to No. 3? I don't see Who Wants to Marry a Survivor on the fall schedule.

Yes, Paul, GE is a behemoth. But gravity is an elephant's graveyard.

While a bittersweet tale, I am glad to hear that your friend's family was well taken care of thanks to your friend's father's timely investment. But keep in mind that he bought into his company when it was selling for just a few times cash flow and a P/E ratio in the low-teens. The recipe for equity success can quickly become unsavory if you only factor in the ingredients without considering the quantities involved. The path to yesterday's made widow might be tomorrow's widow maker.

"GE shareholders have done well because GE has done well," Paul writes. Unfortunately, the company itself hasn't done nearly as well as the shareholders have. If you checked out Paul's statistical marinade you will see that GE's annualized earnings growth over the past three years has been a paltry 6% while sales have climbed an average of just 12% a year. (No relation to the twelve cents I introduced earlier in this rebuttal.) And certainly no relation to the 51%, 41%, and 54% of total return to shareholders over each of the past three years. Chasing the past is a dangerous game when momentum goes both ways. Put simply, GE has always been a quality company, but that has never liberated it from the inertia of realistic valuation metrics. There isn't a single gauge that I can find that justifies GE trading this high -- well, save for Paul's fascination.

Vote Results »

 This Week's Duel