You're Wrong to Sell General Electric

Apologies for the provocative title, but you must admit: There's been a lot of selling going on at General Electric (NYSE: GE) these past couple days. Yesterday, as the full extent of Japan's nuclear crisis began to dawn on the world, investors sold off GE shares en masse, sending the stock tumbling as far as 4.5%. Shares fell again today, dropping as much as 6.7% before paring those losses. (Elsewhere in the nuke industry, uranium suppliers USEC (NYSE: USU), Uranium Resources (Nasdaq: URRE) and Cameco (NYSE: CCJ) are also taking their lumps.)

The problem, in a nutshell, is this: Three reactors at Japan's Fukushima Daiichi nuclear power complex were damaged by Japan's earthquake and subsequent tsunami. All three incorporate GE's "Mark I" reactor container. While details remain sketchy, it appears that at least two of those reactors are now in some stage of meltdown. Consequently, investors are nervous. They worry that as Japan's nuke plants continue to melt down, GE's liability will mount up -- and that's weighing on the stock.

Newsflash
Well, stop worrying. Japan has two laws regulating liability for nuclear accidents such as the ones we're seeing unfold today, both updated in January of last year. The Law on Compensation for Nuclear Damage and the Law on Contract for Liability Insurance for Nuclear Damage combine to assign liability for losses up to $1.2 billion to the operators of the plants. Losses beyond that point are covered by the Japanese government. GE, however, does not operate the plants. As a result, its legal risk as a result of this disaster is "contractually zero" (as an analyst at Barclays Capital puts it.)

Some pundits point out that there is an apparent loophole in the law. Specifically, an exception for "damage ... caused by a grave natural disaster of an exceptional character." I agree that a 9.0-factor earthquake, and island-swallowing tsunami probably meet that definition -- but that's not point. This exception, as I read it, works not to shift liability from the plants' operator (Tokyo Electric Power) to the builder (GE) -- but from the operator to the government.

Foolish takeaway
If you're selling General Electric on fears that it's sure to foot the legal bill for Japan's nuclear disaster -- don't. It won't.

On the other hand, if you want to sell GE because it costs more than 18 times earnings, but is expected to grow slower than 13% over the next five years, or because you think Jeffrey Immelt is foolish (small "f") to be buying credit card debt from Citigroup (NYSE: C) so soon after the credit crisis ... go right ahead. I'm right there with you.

Keep track of how GE navigates the Japanese nuclear crisis: Add it to your watchlist.