Warren Buffett famously said, "Be greedy when others are fearful and fearful when others are greedy."
That advice may not always to lead to wise investments, but it underscores a core truth of investing: In order to find a stock that will outperform the market, you have to see value where others don't.
One stock that the market is undeniably fearful of these days is General Electric (GE +2.10%). Shares of GE plunged 13% last week following an awful third-quarter earnings report, giving it its worst weekly performance since at least the financial crisis.
After the recent sell-off, there are still reasons the stock could fall further, as analysts continue to downgrade the stock and investors worry that the dividend could get slashed. However, with shares at a five-year low, there are a number of catalysts that could make this an excellent entry point as the company begins its turnaround under new CEO John Flannery. Let's take a closer look.
Image source: General Electric.
Changing of the guard
John Flannery took over as CEO of General Electric in August, replacing Jeff Immelt, who had stewarded the industrial giant for 16 years. Immelt presided over a colossal loss in shareholder value, as GE was the most valuable publicly traded American company when he took the reins from the much-lionized Jack Welch. Since then, GE has shed more than $150 billion in market value and has been the worst performing stock on the Dow. The conglomerate fell behind on innovation during Immelt's tenure. Additionally, he bet heavily on the company's financial services, which backfired during the financial crisis. Immelt often inflated earnings with myriad adjustments, caught flak for being heavily compensated despite a lagging share price, and endorsed a wasteful corporate culture. Reports recently emerged that he had an empty private jet follow him in case his own had mechanical problems.
In other words, his ouster is long overdue. Flannery is already making his impact felt. Earlier this month, the company announced that CFO Jeffery Bornstein would step down, along with two vice chairs. With an eye on cutting $2 billion in annual costs, the new CEO is reeling back perks by grounding the company's corporate jet fleet and selling the planes, axing a company-car program for about 700 execs, and putting the kibosh on an annual Florida retreat for executives, filled with fishing, golfing, and sunshine. In addition to saving money, Flannery is trying to change the company culture by sending the message that the old corporate excesses are no longer acceptable, especially given the stock price.
Flannery also has bigger moves planned, saying he aims to sell off businesses worth as much as $20 billion over the next two years.
A change in leadership doesn't automatically translate into a turnaround, but it's often the most important catalyst in resurrecting a flagging business. McDonald's (MCD +1.55%) shares have soared since CEO Steve Easterbrook took the helm in 2015, as he's made key changes, like rolling out all-day breakfast, refranchising company-owned stores, and improving McDonald's value menu. Similary, Wal-Mart (WMT +2.15%) stock is up more than 50% since CEO Doug McMillon, who took over in 2014, implemented a turnaround plan that involved raising wages, cutting back on new locations to invest in current stores, and focusing on e-commerce, including its $3.3 billion acquisition of Jet.com.
Strong market conditions
GE is not a flagging retail company trading at multiyear lows because the broader industry is suffering. Many of its businesses have bright futures ahead. The company is a leader in manufacturing heavy equipment, like jet engines, wind turbines, and MRI machines.
Its power segment has been an eyesore of late -- and management cautioned that this trend would persist through next year -- but most of its business segments are seeing steady growth. GE's peers, like Honeywell, United Technologies, and Siemens, are trading at or near all-time highs, and GE's margin in its business segments is actually similar to those other industrial conglomerates. However, the company's overall gross margin is much lower, an indication of wasteful spending and an inefficient corporate structure.
Flannery cautioned that 2018 would be a reset year, but he also said that cash flow would be "substantially higher" because of "lower structural headwinds and restructuring charges."
Turnarounds can take years, but the only thing that needs to change in order for the stock to begin recovering is investor sentiment. That could happen as soon as the company's investor meeting on Nov. 13, when Flannery will have his best opportunity yet to outline his strategy for the company and convince shareholders that better times are ahead. If he succeeds, this could be a classic example of Buffett's sage advice above.
