That’s because of the company’s tangible book value per share (its net liquidation value in case of bankruptcy) which peaked at $6 in early 2015 but has since slid a remarkable $11.5 per share.
(Source: Ycharts)
That means that GE’s intrinsic value might be far below the $6 that JPMorgan is warning it might fall too. In fact, GE’s rapidly shrinking, and deteriorating businesses might be worth nothing at all. That’s not to say that I think GE will go bankrupt, but I certainly think it’s looking more and more likely that GE is going to have to keep selling or spinning off units until potentially the future GE is left with nothing but its Aviation unit, the one thriving part of the business.
In the meantime, deep value investors are going to be left with effectively no dividend to speak of and possibly several more quarters (or even years) of falling share prices. With so many great deep value opportunities out there (here are 11 stocks I’ve been buying during this correction) I can’t think of any reason for investors to take a flyer on this foundering and still flailing industrial giant.
Bottom Line: Deep Value Investing Can Be A Great Strategy But There Are FAR Better Choices Out There Than GE
There is a big difference between a deep value opportunity and a value trap. Good deep value stocks are those with strong core assets, solid management teams, and otherwise good and growing businesses. Their fundamentals are strong, meaning that revenue, cash flow, and dividends are all moving higher. For such companies you can buy with confidence knowing that at some point the market won’ be able to ignore strong and rising fundamentals forever and thus the valuation multiple will soar, earning you strong capital gains. This is the core strategy of my high-yield income growth retirement portfolio. On the other hand value traps are companies with:
- Weak balance sheets
- Deteriorating fundamentals (sales, earnings, cash flow)
- Falling dividends
- No clear long-term growth runway
Such stocks can see their share prices not just languish in the toilet forever, but can even fall to zero. No blue chip, no matter how storied, is immune from the creative destruction of capitalism. Sears was once the world’s largest retailer (the Amazon of its day) and is now bankrupt and likely headed for liquidation. While GE will probably survive in some form, I can’t personally bet my hard earned money on when or where this low-quality stock will bottom and recommend you avoid taking this high-risk gamble yourself.
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