The world of investing can seem black and white, even though nothing could be further from the truth. Particular investments made for one purpose by one investor are made for a completely different reason by another investor. Furthermore what is a “good investment” for one investor is flat out dumb, for another. This is what makes the various Buy, Sell, Hold recommendations from stock analysts kind of difficult to take seriously.
JP Morgan Cuts GE Rating
The reality is that investors of all kinds who want to use investment analysis from financial firms need to carefully read the entire text, not the headlines that get carved out by various news organizations. The reasons for cutting or raising a rating on a stock may have nothing to do with your investment goals, making those one-word ratings meaningless to you.
Today, Marketwatch, and others report that JP Morgan cut its rating on GE stock from overweight to neutral. Most intriguing is the line in which the company calls GE stock, “dead money.”
Dead money, in case you are unfamiliar with the term, means that the money is not growing or earning anything, while it could be earning money elsewhere. In particular, dead money refers to funds that are missing out on an opportunity elsewhere because they are tied up in their current location. In this case, JP Morgan means that you should be investing in another stock, because GE stock will not be going up any time soon.
This sentiment is an interesting insight into how stock selection and analysis works at big financial firms. In short, it shows that increasing stock price, or capital gains are really all that wall street analysts care about.
You see, GE currently has approximately a 3.5 percent dividend yield. In other words, while you are waiting for GE stock to appreciate, you’ll be earning 3.5 percent on your investment. While that is not anywhere near the 5 percent yield investors would love to see on their money, it is a pretty solid return in today’s near-zero interest rate environment. It can hardly be called “dead money.”
And, neither GE nor any other major financial firm is predicting a big stock slide for GE. Today’s price action is primarily a result of the news about JP Morgan. In other words, for today, at least, GE’s stock price is a self-fulfilling prophecy caused by a major financial firm.
Is Now Time to Sell GE?
So, is now the time to sell GE?
Is now a good time to buy GE?
The answer, as it so often does, depends upon your goals and investment objectives. GE is a huge-multinational conglomerate. It has divisions on every continent and is tied in to industry everywhere. This means two things. First, and foremost, GE is far too large, and far too diversified for anyone, anywhere, to consider GE a growth stock. GE is a value stock. In many ways, GE is THE value stock.
Value stocks, in contrast to growth stocks, do not have quick, or large, price movements. By definition you should not expect a large capital gain (or loss) from GE in the short-term. In fact, the objective for investing in value stocks is to reduce the volatility of the overall portfolio, and whenever possible to earn long-term profits via a combination of both dividends and capital gains. With GE so intricately tied to big industry, the company is almost a proxy for the economy of the world in general. If the global economy recovers, GE will prosper.
So, why would JP Morgan cut the rating of a value investment paying a solid dividend, because of its potential to not have any capital-gains over the short-term?
The answer is that stock analysts and their firms are graded both for internal purposes and by third-parties based upon how their recommendations stack up against the movement of the stock price. Total return, that is the return that includes dividends, is a secondary consideration if any at all.
So, should you buy or sell GE stock?
The answer to that question depends on why you own, or want to own GE stock. If the idea of earning 3.5 percent while waiting for GE to benefit from a global recovery that might be a year or two (or five) away, sounds good, then by all means continue to hold your GE stock or buy in. If the idea of “only” earning 3.5 percent when you could be taking more risk in order to earn a higher return, then you may want to question why you own GE stock in the first place. The company was never going to be a high capital gain stock, and it won’t start now. If you want more growth, then start looking for a better growth investment.
For this Monday morning, things are the same at GE as they were last week, and last month, and last year. You’ll earn a solid dividend and benefit from long-term capital appreciation with your GE investment, but you shouldn’t plan on getting a 20 percent return in a year or two from a stock this big and diverse.
This article is for information purposes only. Nothing herein should be considered advice to buy or sell securities. As of the time of publication, the author held no positions in any of the stocks mentioned, although that could change at any time.