According to a Form 4 filed with the SEC, William Beattie, a holding company connected to William Beattie purchased 10,000 shares of General Electric Company (NYSE:GE) on April 24th at an average price of $21.80 per share. Beattie serves on GE’s Board of Directors and so this transaction had to be reported as an insider purchase. The holding company now owns about 31,000 shares, with Beattie owning close to 7,000 shares directly. We track insider purchases because as a general rule it isn’t rational for insiders to buy more shares and increase their company-specific risk; the expected upside must be high to outweigh the benefits of diversification. Studies in fact show that stocks bought by insiders exhibit a small outperformance effect (read our analysis of studies on insider trading).
General Electric Company (NYSE:GE) is coming off a quarter in which revenue was essentially unchanged compared to the first quarter of 2012, though due to a small increase in margins and a lower effective tax rate the company showed a16% increase in net income. However, we would be skeptical that those sources of earnings growth are sustainable as long as revenue remains flat and so would consider GE a low-to-no-growth company. Given that, the trailing earnings multiple of 16 seems a bit higher than we would like in value terms, though Wall Street analysts expect some improvements and as a result the forward P/E is 12. We would note that GE pays a dividend yield of 3.5% at current prices and dividend levels; that isn’t enormously high, but income investors may find the company’s large size to be an indicator of stability (and might also note that dividend payments have been increasing over the past few years).
We track 13F filings from hedge funds and other notable investors as part of our work developing investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the market by an average of 18 percentage points per year), and can also use our database to find individual filers who have reported large positions in General Electric Company (NYSE:GE). Billionaire Ken Fisher’s Fisher Asset Management owned over 30 million shares at the end of December (find Fisher’s favorite stocks) while large hedge fund D.E. Shaw increased its stake by 35% to over 11 million shares (research more stocks D.E. Shaw was buying). Renaissance Technologies, founded by billionaire Jim Simons, initiated a position of 8.9 million shares during the fourth quarter of 2012 (see Renaissance’s stock picks).
GE’s peers include Siemens AG (ADR) (NYSE:SI), Koninklijke Philips Electronics NV (ADR) (NYSE:PHG), Honeywell International Inc. (NYSE:HON), and United Technologies Corporation (NYSE:UTX). All four of these companies are valued between 11 and 13 times their forward earnings estimates, placing General Electric Company (NYSE:GE) in the middle of this peer group on that basis. All four also reach that level through significant earnings growth from where things currently stand, so the sell-side has similar expectations for all five businesses. We’d note that in the case of Philips and Siemens earnings growth would be a reversal of recent results, as those two companies each reported a double-digit percentage decline in net income in their most recent quarter compared to the same period in the previous fiscal year. Honeywell is actually in a similar position to GE, with all of its earnings growth coming through an increase in the company’s net margin. United Technologies reported better numbers on both top and bottom lines in Q1 versus a year earlier, but the revenue growth was caused by an acquisition and so likely wouldn’t be repeated in the core business going forward.
Value investors, in our view, shouldn’t be paying too much attention to this peer group at this time. The earnings multiples are not very high, but are high enough that we’d want to expect sustainable earnings growth over the next several years and we don’t see that at GE or the other companies. More research into General Electric Company (NYSE:GE) might be worthwhile, however, for income investors who favor blue-chip businesses.
Disclosure: I own no shares of any stocks mentioned in this article.
