John Buckingham is a leading money manager, best known for his expertise in value investing; he is a...
Two Favorite Fallen Angels: GE and Volkswagen
02/14/2018 5:00 am EST
I continue to believe that the best investment plan to follow at this point is to invest in high-quality stocks that have already fallen over a cliff, explains Jim Powell, editor of Global Changes & Opportunities Report.
That’s not to say that fallen angels won’t decline if the market drops sharply, because they will. However, they will usually drop less than the market, and will bounce back more quickly.
Longer-term, blue chip fallen angels also have good track records for fixing the problems that drove their prices down. When the angels find their wings again, the profits they often deliver can be eye-popping.
General Electric (GE) continued to report bad news in January — and investors were in no mood to hear it. Accordingly, GE dropped from $19.18 the previous month to just $15.64 on February 2 — which brings the total decline from its most recent peak to 48.9%.
GE has been working to turn itself around by selling off, or discontinuing its poorly-performing power equipment and financial service operations.
Now the company is planning to do more extensive house cleaning. President John Flannery, who took over GE in August may sell or downsize the company’s aviation and healthcare operations.
In fact, the conglomerate business model that GE adopted before the 2007-2009 economic meltdown may be on the way out. I hope that proves to be the case because it will clear the way for a bigger rebound than if the company tries to fix everything it currently owns that isn’t performing well.
I continue to believe that GE will solve its problems and turn itself around as it has done several times in the past when its outlook was equally bleak — and was occasionally worse. However, the recovery will undoubtedly take at least three years. The bright side of the picture is the investment returns should also be greater than first expected.
Volkswagen (VLKAY) is surprising investors in the other direction. I recommended this fallen angel in October 2016 right after its diesel emissions scandal was exposed. When “diesel gate” was reported, VW’s stock plunged 45.1%, from $51.25 to $28.13.
VW’s management subsequently decided that rather than fight the diesel problem, it would ease itself out of that old technology and move instead to producing electric vehicles (EVs). The company has since made considerable progress towards that goal. VW may become the world’s biggest EV maker by 2021.
Volkswagen is already the world’s largest car company by sales, and it made new records in 2017. In addition to VW, the company owns Audi, Porsche, and 10 other brands that are sold worldwide. The bottom line is that our $28.13 investment in Volkswagen is now up 53.2%, to $43.10. I think more gains are on the way.
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