Wall Street Shuns General Electric Company: Should Investors Care?

Towards the end of General Electric's (GE -2.02%) latest earnings call, GE's chief financial officer joked with an analyst about a potential upgrade for GE's stock. In jest, JPMorgan Chase's analyst replied, "Not sure about that, but we'll talk after."

If an upgrade seemed like a long shot then, it seems less likely today. Several analysts recently placed GE on the back burner for 2014, and shares are down nearly 10% year to date. Should investors steer clear of "the General" or buy on the dip? Let's take a closer look.

Source: Flickr/Jeffrey Turner

The noise
The Wall Street ratings game, in my opinion, is primarily a racket for Manhattan's elite, but individual investors can stumble upon insight once in a while. As they say, the devil is in the details. Here's a look at the concerns raised by JPMorgan and Citigroup about GE's shares:

JPMorgan: "We see little relative reason to buy [General Electric] as we think the stock enters 2014 with few upside catalysts, earnings risk, and an increasingly weak Bull case. The 4Q ultimately missed Industrial guidance that was never officially reduced, capping another year of mixed execution...With more conviction in our below-Consensus estimates, limited upside levers from cash deployment, and valuation still not supportive (Industrial P/E implied at parity with group), we remain on the sidelines."

In a nutshell, JPMorgan thinks GE regularly falls short on industrial earnings, yet shares are no cheaper as a result. This so-called trend would suggest an overpriced stock leaning heavily on banking, though I beg to differ. For now, however, let's look at a snapshot of Citigroup's remarks after GE's shares were removed from its "focus list".

Citigroup: "Following assurances at the Dec-18 Outlook meeting that it was on track...Buy-rated GE unexpectedly fell 10 bps short in an otherwise inline but relatively noisy 4Q13...With 5% organic, 34% incrementals, and good cash flow, the fundamentals were mostly as expected. But the missed 70 bps target will be an overhang until we get a fresh set of results in 1Q14 earnings, likely stalling some of the story's near-term momentum."

Despite the financial lingo, the notes show Citigroup was unimpressed by GE's profit margins, which missed expectations by 10 basis points, or 0.1%. For the year, GE expected organic margin growth of 70 basis points, but delivered only 66 basis points. Nevertheless, Citigroup seemed reassured by the "fundamentals" of the business, organic growth, and cash flow. And therein lies the problem.

The signal
While Wall Street "analysis" can in fact be revealing, most often it's revealing in a way that undermines their product -- one that probably carries a hefty price tag. Similar to Oppenheimer's downgrade of GE last month, Wall Street shops like JPMorgan and Citigroup tend to provide misleading information for long-term investors.

What happens is that analysts -- armed with complex financial models -- miss the forest for the trees. On the flip side, investors who embrace a Buffett-like philosophy of buying for the long haul can ignore the blips -- and basis points -- and focus on three key issues:

1. Does GE still have a superior business model?
2. Do shares remain reasonably priced?
3. Do I still have faith in GE's management team?

As a GE shareholder, I believe the answer to all three of those questions remains a resounding "yes" following earnings. The industrial side of GE's business -- the one that matters for future growth -- continues to expand. Industrial earnings jumped 12% year over year with six out of seven segments contributing to growth. Meanwhile, GE Capital is playing a smaller role.

At the same time, GE's shares appear reasonable. They command a lower price-to-earnings ratio when compared with industrial peers, backed by the largest dividend of the bunch.

Source: Morningstar

Finally, Jeff Immelt and company, in my opinion, continue to push the company in a new direction, focusing on an entrepreneurial and collaborative culture that's practically the opposite of the cutthroat operation Jack Welch instilled during his heyday. While Wall Street's sweating over a "noisy" fourth quarter, management's laying a foundation that will allow GE to remain one of the most innovative companies in America. 

Buy, sell, or hold?
Armed with this information -- instead of an Excel spreadsheet -- I believe Foolish investors can make a more grounded decision on whether to buy, sell, or hold GE's shares on the current dip.

What you decided depends on the position in your portfolio, but I wouldn't shy away from GE just yet. This, after all, is a stock that the same JPMorgan analyst called "dead money" last April, and GE shares proceeded to climb 29% by year's end. I'd think twice before jumping ship this go-round.