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Why investors should buy GE and ignore the former CEO

This U.S. advisory has scathing comments on corporate infighting and a bone to pick with one of America’s most famous executives.

There aren’t many companies that reflect the corporate history of America more fully than General Electric. And there aren’t many executives who made themselves better known to the public than the former CEO of that firm.

General Electric (NYSE-GE) is the last survivor of the 12 companies on the first Dow Jones Industrial Average of 1896. Mr. Jack Welch was CEO of the company for 20 years, from 1981 to 2001, the author of no less than four books on corporate success, and now a vocal critic of his successor.

According to Richard C. Young’s Intelligence Report, that criticism is misplaced. And this is not just a story of one unseemly bit of corporate infighting.

It gives us a look into how conglomerates work, what really makes the share price move and what individual investors can do about it.

When we’ve finished the sizzling story of the crossfire at GE, we will consider Mr. Young’s choices as the top stocks for U.S. investors today.

“Get out a gun and shoot him”

GE’s first quarter results for 2008 were famously bad. The company’s earnings fell, it issued a profit warning and its shares promptly fell 13 per cent. The CEO, Mr. Jeff Immelt, had issued a much more optimistic forecast just three weeks before.

That was in April. Mr. Immelt has subsequently come under fire from his well-known predecessor. And the editor of this advisory doesn’t like it.

Mr. Welch, he says, was “giving advice where it wasn’t welcome. Immelt may have made a blunder, but Welch’s comments were out of line.” Indeed, Mr. Welch was quoted as saying in a CNBC interview that if his successor missed another set of quarterly earnings, he would “get out a gun and shoot him.”

We don’t think Thomas Edison ever said anything like that when he was building up the electric company.

But there’s more to this than just insult and accusation. In Mr. Young’s opinion, this is also about manipulation and mismanagement.

Cooking the books

The editor admits that he was not fond of Mr. Welch before, and likes him even less now. Returning to the CNBC interview again, he quotes the former CEO as saying: “Just deliver the earnings. Tell them you’re going to grow 12 per cent and deliver.”

But hang on, says Mr. Young. “That reeks of earnings manipulation and short term thinking. Any company that meets earnings estimates every quarter is either stuffing the distribution channels or cooking the books.”

A company’s revenues and earnings, he adds, are inherently volatile, especially when that company operates in many different businesses all over the world, as GE conspicuously does.

Clearly, the earnings miss had a direct impact on GE’s share price, “but you have to wonder who is selling,” says the editor.

“The only folk who care about quarterly earnings misses are speculators and momentum players. Discerning individuals who invest serious money pay little attention to quarterly earnings misses.”

In short, Mr. Welch is telling Mr. Immelt to pander to the speculative crowd. In so doing, he may be diverting attention from the real problem.

Grab a mirror

If Mr. Welch wants to point the finger at somebody for GE’s earnings miss, says Mr. Young, “he should grab a mirror.”

The source of weakness in GE’s results, the editor continues, was the finance division — “the division Welch assembled during his reign as CEO. Excluding that division, GE’s businesses performed just fine.”

Results in the infrastructure business were exceptional, in fact. Revenues were up 23 per cent and operating profit up 17 per cent.

So Mr. Immelt should ignore the cries of Mr. Welch and turn his attention to a little housecleaning. Consumer finance is a poor fit for GE, Mr. Young concludes. It should be divested or spun off — not now as financial markets are languishing, but as soon as there’s a glimmer of improvement at GE Money. The company’s future is in infrastructure, not consumer lending.

Meanwhile he advises investors: “If you do not yet own shares of GE, buy them today. And if you have new money to invest, GE should be at the top of your list. The sell-off of GE shares was a gross overreaction that presents a compelling buying opportunity. My dividend yield chart shows that GE shares now yield more than 4% — the stock’s highest yield in over 20 years. Buy.” The yield is now at 4.72 per cent and the stock at $27.00

Beyond this very clear recommendation, Mr. Young has five more blue chips at the top of his buy list.

Nest eggs and luxury spending

Here are top five stocks for American investors today, in Mr. Young’s opinion. Note that three of them are tied in with the luxury and consumer business in one way or another.

1) Federated Investors (NYSE-FII). As the baby boomers tuck away their nest eggs, this fixed income and money market management firm is bound to benefit.

2) Sysco (NYSE-SYY). This giant food distributor dominates the restaurant industry in America and enjoys economies of scale in the fight against rising food prices.

3) American Express (NYSE-AXP). The rich haven’t stopped spending, and AmEx has a Centurion card with a minimum annual spending limit of $250,000 — available by invitation only.

4) Tiffany & Co. (NYSE-TIF). See above.

5) United Technologies (NYSE-UTX). United’s fuel cell technology has been tested on many manned space flights and is now being put to widespread use across the U.S. and elsewhere.

As for the heads of great companies, their disputes and debates may make for entertaining headlines, but there’s more to it than that. Pay attention to what’s being said and you can discover a great deal about where the company’s going and whether or not you should follow it. Think Nortel — but have a nice weekend anyway.