Why Did This Massive Hedge Fund Company Sell General Electric?

The latest 13F season is commencing, when many money managers issue required reports on their holdings. It can be worthwhile to pay attention, as you might get an investment idea or two by seeing what some major investors have been buying and selling.

For example, consider Bridgewater Associates, one of the world's largest hedge fund companies. According to its recently released 13F statement, Bridgewater Associates sold all of its shares of General Electric Company (NYSE: GE  ) . Bridgewater's stake in GE had been worth more than $10 million, which sounds like a lot but really was rather minor considering that its reportable stock portfolio's value tops $12 billion. It's not clear exactly why the shares were sold, but in some cases, when a big investment management company sells a small position in a stock, it could merely be a matter of clearing it out of a client's account, upon request.

Still, why might anyone sell General Electric, and why might investors buy and hold it? Let's look at what's going on with the company.

The big picture
For starters, as many people know, it's a mammoth conglomerate, offering turbines, light bulbs, medical imaging equipment, locomotives, subsea drilling systems, underground mining equipment, home appliances, financial services, jet engines, and much more. General Electric has been transforming itself lately, becoming much more of an energy company, with oil and gas now its fourth-largest revenue generator. For example, GE has partnered with major U.S. freight rail operator CSX  (NYSE: CSX  ) to explore the use of liquefied natural gas as fuel for locomotives.

Part of General Electric's transformation involves spinning off its sizable retail finance business, which it's doing via a massive initial public offering. GE Capital contributed about a third of GE's revenue in 2013, though that share has been shrinking some in recent years.

Huge and nimble
General Electric's fourth quarter featured revenue up 3% over the year-ago quarter, earnings per share up 20%, and its order backlog growing by 8% to a record $244 billion. It's worth peering a little more closely at the backlog, which featured orders for equipment rising by 10%, versus 5% for services. That reflects the company's renewed focus on its industrial businesses. Orders for power and water equipment and services grew particularly strongly.

CEO Jeffrey Immelt noted, "We had strong operating performance for the year and are pleased with our execution in 2013, taking $1.6 billion of cost out, growing margins, reducing the size of GE Capital, and returning more than $18 billion to shareholders." That $18 billion took the form of both dividends ($7.8 billion) and stock repurchases ($10.4 billion).

It can be hard for such a huge company (its market capitalization was recently near $260 billion) to be nimble, but General Electric has been thinking outside the box a bit in that regard, investing in and partnering with smaller companies on new technologies and sponsoring competitions to develop innovative solutions. Through its relationships with many private-equity firms, it has access to thousands of small enterprises.

Challenges and opportunity
All isn't perfect at General Electric, though. Following its last earnings report, management noted overall weakness in Europe and in oil and gas drilling in North America. Major integrated oil companies have been careful with capital spending lately, but per CEO Immelt, national oil companies have been actively spending.

If you're not interested in General Electric itself, you might still learn a lot about other companies' fortunes by keeping an eye on GE. Its aviation division, for example, has been a strong performer, which bodes well for flight support specialist Heico (NYSE: HEI  ) , which expects revenue growth in 2014 of between 12% and 14%. The fact that General Electric's mining orders dropped some 60% recently doesn't bode well for others in the mining arena, such as Joy Global (NYSE: JOY  ) or Peabody Energy (NYSE: BTU  ) , which have noted oversupply issues and low prices as domestic challenges.

You should be interested in GE, though. With a forward price-to-earnings ratio near 14 and a dividend yield of 3.4%, General Electric stock looks rather appealing. Some insiders also think so, as they've recently scooped up lots of shares. CEO Jeffrey Immelt bought more than $1 million worth.

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  • Report this Comment On February 17, 2014, at 9:40 PM, GrampaRick wrote:

    One person's trash is another person's treasure. A hedge fund may have sold GE, but Warren Buffett dramatically increased his holdings with it.

  • Report this Comment On February 25, 2014, at 9:39 AM, Haise wrote:

    Like insiders, hedge funds can sell for any number of reasons, but the reasons for buying are considerably limited. But I also like this one. Seems like a good holding for the taxable account over the next 2-3 years with the tax-free spin-off and potential catalysis, depending on what the two companies do with their newfound cash.

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