A Look Inside General Electric's Freefall

As General Electric fell below $6 for the first time since 1991 on Wednesday (the share price fell as much as 18%, to $5.73, before closing at $6.69, down $0.32 or 4.6%), my colleague Jena McGregor and I checked in with three money managers to get their assessment of GE’s situation as well as an outlook for the stock. Bob Bacarella, manager of the $30 million Monetta Fund, thinks the primary reason for GE’s freefall is concerns about credit quality. (GE is one of six companies in the S&P 500 with a triple-A credit rating from Standard & Poor’s, which, like BusinessWeek, is owned by McGraw-Hill.) In recent weeks, Standard & Poor’s as well as Moody’s Investors Service has signaled that a ratings downgrade may be in GE’s cards. Bacarella figures investors are positioning themselves before a downgrade happens, so the pressure on the fixed-income side is spilling over to equity markets. He sees “a great buying opportunity,” and says he is adding to his GE stake, which he started building late last year. While concerns that GE Capital’s finances are real, GE is “not a pure bank play where you’ve just got worry about leverage and sustainability,” Bacarella says. Sure, GE Capital has problems and may need to take some write-offs, but he continues to like the industrial side of the conglomerate’s empire. ”GE is one of those companies I believe in the next 3 to 5 years we’ll do well with,” he says. Another reason the stock is under pressure is that dividend-oriented mutual funds might be selling their holdings on the heels of GE’s dividend cut. Yet Bacarella finds it reassuring that management is buying GE’s stock, too. Jena spoke to Scott Lawson, an analyst and portfolio manager at Westwood Holdings, who has downsized his GE position in recent months to a size he calls “modest.” “There’s a psychology bias there,” he says, that stocks tend to get more volatile in the $5 to $10 range due to things like associated options. Lawson notes that GE has traded in line with financial services stocks for some time now, where the investing philosophy appears to be “if in doubt, people sell.” He thinks most of the freefall this morning was from traders “smelling blood in the water” on concerns about GE Capital and that although the cost of cost of GE’s credit default swaps, which insure GE’s debt, hit a record, high CDS spreads for the company are nothing new. Another contributing factor could have been a report from a UBS analyst issued Tuesday that said GE may have to raise more capital. However, GE issued a statement to investors this morning saying a need to raise new capital “is pure speculation.”

Robert Hagstrom, manager of the Legg Mason Growth Trust and an author of several books about Warren Buffett, puts it more succinctly: “The market does not like uncertainty/complexity/controversy,” Hagstrom says. There are times when these attributes signal massive mispricing and GE may be mispriced, he concedes. But right now “PhD investing” is not working. Says Hagstrom: “There are so many simple high-quality blue-chip names that can go up 50% or more, there is no need to make your life more difficult.”

Do you think GE can overcome these challenges?

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