Top Picks 2018: General Electric (GE)

01/01/2018 5:00 am EST

Focus: INDUSTRIALS

George Putnam

Editor, The Turnaround Letter

Our top conservative, income-oriented idea for for 2018 is General Electric (GE), asserts turnaround specialist George Putnam, editor of The Turnaround Letter.

While former chairman and CEO Jeffrey Immelt’s early years at the helm were full of promise, his 16-year tenure will be remembered for GE’s near-collapse in the 2008 financial crisis, the dismantling of the company’s financial services operations, its cash-draining share repurchases and dividends, poor governance and weak operating results.

This past summer, GE was thrown into disarray with an abrupt change-over in leadership and the recognition that its cash flows were much weaker than previously believed. As a result, investors fled from GE shares, which have declined 45% this year and now trade at their 1997 price level.

The company clearly has problems, but disarray does not mean “game over.” New CEO John Flannery is aggressively reshaping GE’s underlying philosophy to focus on cash flows, capital allocation and accountability.

His strategy should improve the company’s core profitability and highlight the value of its various businesses.

Three divisions will be retained (Power, Aviation and Healthcare), which have strong market positions and large installed customer bases. As much as $20 billion in non-core operations will be divested.

Flannery’s resolve is highlighted by his gutsy decisions to halve the dividend and remove half of the board members. While the turnaround will likely take a while, the rebound potential in the stock is significant, and investors are being paid a 2.8% yield during the wait.

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