Irrational Fear Has Made This Stock Cheap, but Not for Long

General Electric (NYSE: GE  ) recently released its quarterly results, and to say it did well is an understatement. Profits were up 21% to $0.35 per share, infrastructure orders were up 24%, and with contracts from Boeing (NYSE: BA  ) and Airbus for GE's LEAP-X jet engine, backlog came in at a whopping $189 billion. But despite all this promising news, GE share prices fell. So what's the deal?

Fear of another recession
It's no secret that the recession hurt companies like GE. According to the Federal Reserve, production declined sharply in 2008 through the first half of 2009, and as a result, companies like GE, Siemens (NYSE: SI  ) , Tyco International (NYSE: TYC  ) , and 3M (NYSE: MMM  ) , saw some pretty severe drops in revenue.

Luckily, 2010 saw production rebound, and the Federal Reserve reported that the gains were stronger than previously thought. Additionally, the U.S. Census Bureau announced that as of March 2011, manufacturers' sales increased 11% from March 2010, making the case for an economic resurgence seem all the more plausible. The worst of the Great Recession took a certainly sharp bite out of our national output. And while the percentage changes here might underwhelm you, consider the decline from 2008-2009 cost Americans more than $200 billion of lost production -- ouch!

 

GDP % Change Based on Current Dollars

GDP in Billions of Current Dollars

2010

3.8%

$14,660.4

2009

(1.7%)

$14,119.0

2008

2.2%

$14,369.1

However, with the current debacle about raising the debt ceiling going on at Capitol Hill, there is fear among investors that we may be headed for another recession, this time triggered by a U.S debt default. Like it did before, a recession would likely hurt GE's profits. Consequently, investors could be putting that fear into their decision making process regarding GE's stock price.

Not all fear is rational
It's true that GE is a cyclical company, and when a recession hits, it's likely to see losses. But the good news is many analysts believe that the nitwits on Capitol Hill will reach an agreement -- thereby hopefully avoiding another recession. Still, regardless of what happens on Capitol Hill, GE is poised to make it through an economic storm -- perhaps a little worse for wear, but nonetheless intact. Plus, by looking at GE's latest quarterly results compared to its year-ago results, it's easy to see that GE is capable of bringing in healthy profits and continued growth following a recession:

General Electric Quarterly Results

2011-03

2010-03

Net income from continuing operations (millions) $3,508 $2,396
Basic earnings per share $0.32 $0.17

Source: Morningstar financials.

Lower stock price, greater returns
There is justifiably, fear that another recession is looming on the horizon if the debt ceiling issue isn't resolved it time, and that seems to be affecting companies like GE. But like the great Warren Buffet said, "Be greedy when others are fearful" (as Buffett definitely did with GE during the last recession). Well, investors seem to be fearful in the case of GE, so perhaps now is the time to get in.

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Fool contributor Katie Spence hopes Congress gets its act together. She does not own shares of any company mentioned above. Motley Fool newsletter services have recommended buying shares of 3M. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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