At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But we're going to show you whether the analysts know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Back in the pool
What do you do when one of the best stock pickers in the business takes a close look at the headlines and tells you it's time to buy one of the biggest companies on the planet? Me, I listen up. And from what I hear, Argus Research believes the recovery is real, and it's time to pile back into General Electric
By now you probably know all about the turnaround at GE: how it's investing heavily in the energy infrastructure space and vying to displace industry incumbents Schlumberger
GE took all these moves, and more, and parlayed them into a big earnings beat earlier this month, and Argus thinks there's more where that came from. Argus argued last week that it's finally time to own GE again, as the analyst:
- Cited "higher equipment orders" for three quarters running.
- Predicted this trend will continue alongside similar improvements in GE's health-care imaging and aircraft engines businesses.
- Observed that GE Capital is no longer a drag on results.
In addition, with the deal to unload most of NBC Universal to Comcast
Let's go to the tape
If all that sounds like a good bull thesis to you, then it only gets better as you review Argus' record on past industrial conglomerates picks:
Argus' Picks Beating S&P by
|3M||Outperform||****||7 points (picked twice)|
|Textron||Outperform||***||135 points (!)|
By definition, industrial conglomerates are so big that there aren't a lot to choose from. Still, Argus has done a good job of covering those few true titans that do exist, with a great record on the picks it's made in the industry over the past few years. This bodes well for its success with Friday's GE recommendation.
A Foolish caveat
If I have any reservations about Argus' recommendation, it would have to be on the subject of valuation. General Electric, as we've all come to realize, is a bit of a strange beast. The company's a cash flow monster, generating $14.7 billion from industrial operations alone last year. But half-bank, half-industrialist, the company doesn't subject itself well to standard free cash flow analysis.
For that reason, I'm forced to default to the more traditional P/E ratio on GE -- and from that perspective, I have to say that the stock is starting to look a mite pricey. Having risen 26% over the past 52 weeks, GE shares now sell for a whopping 19 times earnings. That's quite a lot considering the company only grew earnings by 6% last year; it's even expensive if management manages to deliver on the Street's consensus 13% long-term growth estimate.
True, the company pays a nice dividend -- 2.8% -- but even that extra return on investment probably isn't enough to make GE a profitable play for investors at today's prices. In short, while I'm optimistic about GE's business, and impressed with Argus' record of recommending similar businesses to-date, I simply cannot endorse GE at today's price. To me, the stock looks much more like a "sell" than a "buy."
Fool contributor Rich Smith does not own, nor is he short, shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 649 out of more than 170,000 members.
Netflix is a Motley Fool Stock Advisor pick. The Fool owns shares of Schlumberger.
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