Often investors look for companies that do one thing and do it well. While specialization can lead to great success, eventually it can be a limiting factor. That's why another appealing type of investment is basically the polar opposite, putting multiple businesses under one roof to create a portfolio. I'm talking about conglomerates. If that sounds more your speed, here are three stocks to watch in conglomerates: Berkshire Hathaway (NYSE: BRK-B), General Electric Company (NYSE: GE), and Leggett & Platt, (NYSE: LEG).
The giant of giants
When it comes to name recognition, Berkshire Hathaway and its CEO, Warren Buffett, are probably two of the most famous names on Wall Street. At its base, Berkshire is an insurance company, owning the ubiquitous Geico brand, among others. But that's just the tip of the iceberg here, as Buffett has long used the insurance business to help fund investments in other companies. That includes large stakes in publicly traded companies and also full-on acquisitions of both large and small ones. The list of what Berkshire does includes candy, utilities, trains, furniture, jewelry, real estate services, and more. Buffett has created an eclectic collection of companies and, along the way, turned them into a giant profit machine.
Many conglomerates try to run all of their businesses from the top down. One of Berkshire's biggest strengths is that it doesn't. In fact, Buffett tries to buy great companies run by great managers and then leaves them alone to do their job. That freedom allows managers to make business decisions without the fear of next quarter's earnings report. And, in turn, these well-run businesses help Berkshire put its capital to work. That includes everything from building new electric plants to "bolt-on" acquisitions at smaller operations.
So while the media often focuses on what stock Buffett is eying, they're missing the forest for the trees. Berkshire's portfolio of owned companies is what this gigantic conglomerate is really about.
The other big name in the conglomerate space is General Electric. This giant takes a more hands-on approach, as top management gets involved more in the day-to-day operations of its subsidiary companies, with the goal of being one of the top players in every industry in which it participates. That's been good and bad over time as the company has expanded aggressively into areas that have turned out to be problematic.
For example, the profits in the company's finance arm were robust in the years before the 2007-to-2009 recession. That led management to allow this segment of the business to grow until it was disproportionately large. And when the recession hit, the finance arm nearly took the entire company down with it, leading to a government bailout, a dividend cut, and a steep drop in GE's shares.
It's no wonder GE chose to prune that business back. In fact, GE has been shifting back a lot, jettisoning non-industrial businesses and refocusing around its core industrial products. That, however, doesn't mean GE isn't a conglomerate. In fact, its industrial arm creates products as varied as windmills, medical equipment, and jet engines.
The interesting thing about GE's shift is that it shows the cyclical nature of conglomerates. They tend to move beyond their core competencies and then slim down -- and then do it all again. GE is in slimming mode, which could prove a good buying opportunity, as slimming usually means laggard and distracting businesses are sold off.
Small is big, too
Don't think that huge companies are the only ones that can successfully cobble together portfolios of businesses. In fact, there are plenty of smaller companies that are best looked at as conglomerates. For example, Leggett & Platt's market cap is just $7 billion, compared with GE's $270 billion and Berkshire's $350 billion. But this relatively tiny company operates in just as varied a list of businesses.
Leggett is probably best known for making bed springs. But it also makes tubing for the aviation industry, fixtures for retailers, and office furniture, among many other things. Unlike GE and Berkshire, however, there's more of a connecting line to what Leggett does, as most of its key operations involve shaping metal--a pretty boring business focus that won't often land you in the headlines. And while its operating margins don't match up to GE's, it's bringing together relatively lower margin businesses in the same way that GE brings together higher margin, and perhaps more exciting, ones.
Like GE, Leggett has been slimming down and refocusing to improve operating results. And like both the giants, Leggett is always on the lookout for a good acquisition. The difference is that what would be a bolt-on purchase for GE or Berkshire can really move the needle for a small company like Leggett, which is why you as an investor might want to consider a smaller conglomerate.
The movers and shakers
If you're watching conglomerates, you have to keep an eye on the giants such as Berkshire Hathaway and General Electric. They're the leaders, the ones that make the biggest and often boldest moves. So both should be on your watch list no matter what. And they might even make a great addition to your portfolio.
But don't get so enchanted by size that you miss the opportunities among the minnows. Conglomerates exist at all sizes and in many different industries, Leggett & Platt is a good example. And it happens to be a pretty interesting company, with an impressive history of over 40 consecutive annual dividend increases -- neither GE, which cut its dividend during the recession, nor Berkshire, which pays no dividend, can match that.