3 Reasons You Shouldn't Ignore GE

The market's lack of response to General Electric's (NYSE: GE  ) recent earnings says that investors may have decided that the Dow's oldest company is past its prime. However, I can think of three reasons that writing off GE is a mistake.

1. It's on an upswing
GE's second-quarter earnings were impressive. Profits rose 21% year over year to $0.35 per share, marking the fifth consecutive quarter of double-digit earnings growth. Infrastructure orders were up 24%. And if you remove the sale of NBC Universal to Comcast (Nasdaq: CMCSA  ) , revenues rose 7%. It appears the company has begun to recover from the effects of the recession and GE Capital's unwise pre-meltdown investment decisions.

2. Built-in diversity
Fellow Fool Rich Smith thinks investors may have failed to respond to GE's earnings because the company is simply too big for the average investor to wrap his or her mind around. I can see his point. The company makes appliances, light bulbs, jet engines, health-care equipment, and nuclear reactors. It also has bets on electric cars and consumer credit. 

I'll admit that it's a lot to follow, but this diversity can act as a kind of safety net. For example, in the last quarter, the continued weakness in the housing market and the end of government incentives led to a 12% year-over-year drop in revenue from appliances. However, the company's strong performance in nearly every other segment balanced out the decrease.

3. Who doesn't want a better light bulb?
I was also happy to see that GE's second-quarter R&D spending increased 40% year over year. Since its founding in 1878, GE's drive to create new and improved technologies has been the company's greatest asset. From its frequently reinvented light bulbs to its developments in smart-grid technology, the company's innovations have paid big returns. For example, GE spent $1 billion developing the GEnx jet engine, which returned $15 billion in orders. More recently, contract wins for its LEAP-X jet engine at Boeing (NYSE: BA  ) and Airbus helped raise GE's backlog -- the total value of orders waiting to be filled --to $189 billion.

Foolish takeaway
There's a reason General Electric has held a position on the Dow Jones Industrial Average since the index's creation. For all of its ups and downs, the company remains a great innovator and an impressive money-making machine. I'd say that's enough to earn the company a spot on your watchlist, or even in your portfolio.

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Fool contributor Patrick Martin owns no shares of any of the companies mentioned. You can follow him on Twitter at @TMFpcmart03. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 02, 2011, at 1:56 AM, EllenBrandtPhD wrote:

    It was simply a matter of bad luck with the timing of the earnings release.

    The very same day, we got bad news about a major delay in the debt ceiling agreement, at a time when everyone - including me and probably you - thought we were on the verge of a timely resolution.

    And the day after, the Dow and the rest of the general market started to get slammed by bear raids all over the place.

    So GE still hasn't gotten credit for what were very decent earnings and several pieces of good news since earnings.

    The Short proportion of the float is still small, and the stock is owed a very nice rally, once the rest of the Dow gets a rally with the final debt ceiling agreement today,

    Don't be headfaked or swayed by Short side propaganda. GE's stock price is now owed at least ten percent, possibly more.

  • Report this Comment On August 06, 2011, at 10:42 AM, kdt34wqx wrote:

    If you buy GE long you lose. At the present dividend, the shares are only worth $13. If they cut the dividend again, GE is worth (a lot) less. Go short or go home.

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