Why GE could be a smart investment for Warren Buffett

Warren Buffett swooped in to rescue General Electric once. Could he do it again?GE's demolished stock rose 5% ...

Posted: Mar 28, 2018 3:23 AM
Updated: Mar 28, 2018 3:23 AM

Warren Buffett swooped in to rescue General Electric once. Could he do it again?

GE's demolished stock rose 5% on Tuesday following chatter that the Oracle of Omaha could make an investment in the embattled company he helped stabilize in 2008. GE was on track for its best day in three years.

Neither GE nor Berkshire Hathaway, Buffett's holding company, would comment on the market rumors.

At first blush, the idea of Buffett or another famed investor taking a gamble on GE sounds a bit crazy. GE has a ton of problems: A mountain of debt, a pile of legal troubles, the biggest pension shortfall in the S&P 500 and a cash crunch caused by decades of bad decisions.

Wall Street has been deeply worried about GE. That was made abundantly clear when GE shares tumbled on Monday -- a stunning rebuke because the Dow spiked 669 points, or 2.5%, that day. GE was the only Dow stock to lose ground. Its stock has lost 57% of its value since the end of 2016.

But even GE's biggest critics concede the stock isn't going to zero. The company isn't rumored to be on death's door like Sears. And Buffett is always searching for a bargain.

Despite its real troubles, GE is still a massive conglomerate that makes everything from light bulbs and jet engines to freight trains and MRI machines. It's expected to haul in $123 billion in revenue this year, more than IBM ($80 billion), Nike ($34 billion) and Twitter ($2.7 billion) combined.

"There is a disconnect between the fear and fundamentals," said Nicholas Heymann, a rare GE bull among Wall Street analysts.

Related: GE's $24 billion buyback boondoggle

Heymann, an analyst at the brokerage William Blair, attributed GE's stock spike to "speculation -- and nothing more than that -- that Berkshire Hathaway might be interested in investing in the company."

It would be fitting for Buffett to make a play for GE now because the stock is trading near its 2009 prices. That was shortly after Buffett poured $3 billion into GE during the financial crisis.

It was a lucrative investment that helped ease fears that GE's reliance on risky short-term financing would ruin the company. Days later, the federal government stepped in to guarantee the commercial paper market after funding dried up.

Similarly, a Buffett investment today would be a huge coup for GE and a signal to Wall Street that the worst may be over.

"It could invert the debate about the company -- quite literally -- from how low to how high GE might move," said Heymann.

Buffett, who sold off his stake in GE last year, is known for making investments when few others see the value. And Berkshire is sitting on roughly $116 billion of cash -- money that's earning very little right now.

Related: Buy high and keep buying? Analysts bullish on already hot stocks

In January, Buffett told CNBC that Berkshire would buy GE at the "right number," without revealing what that price is. GE shares have plunged by nearly 30% since Buffett made those comments.

"My job is to have the capital of Berkshire invested in businesses we think we understand pretty well and that are at an attractive valuation," Buffett said at the time.

There is some overlap between Berkshire's various businesses and GE's. Berkshire owns Burlington Northern Santa Fe, which operates one of the largest freight railroads in North America. GE is among the largest producer of freight locomotives in the world, although it's looking to sell this century-old business to raise cash.

Berkshire also spent $37 billion in 2015 to buy Precision Castparts, which makes parts for aircraft makers, power companies and other industrial firms. GE not only makes jet engines, but it builds turbines and other systems for power plants.

It's too early to say whether Buffett will make another bet on GE.

But it's clear that an endorsement from Buffett would go a long way toward restoring confidence in this fallen company.

West Lafayette
Partly Cloudy
87° wxIcon
Hi: 95° Lo: 68°
Feels Like: 93°
Kokomo
Partly Cloudy
72° wxIcon
Hi: 94° Lo: 69°
Feels Like: 72°
Rensselaer
Clear
73° wxIcon
Hi: 91° Lo: 66°
Feels Like: 73°
Fowler
Partly Cloudy
86° wxIcon
Hi: 93° Lo: 67°
Feels Like: 96°
Williamsport
Partly Cloudy
74° wxIcon
Hi: 94° Lo: 68°
Feels Like: 74°
Crawfordsville
Partly Cloudy
88° wxIcon
Hi: 94° Lo: 67°
Feels Like: 91°
Frankfort
Partly Cloudy
88° wxIcon
Hi: 93° Lo: 67°
Feels Like: 91°
Delphi
Partly Cloudy
80° wxIcon
Hi: 94° Lo: 68°
Feels Like: 81°
Monticello
Partly Cloudy
80° wxIcon
Hi: 95° Lo: 70°
Feels Like: 82°
Logansport
Partly Cloudy
77° wxIcon
Hi: 92° Lo: 69°
Feels Like: 79°
Record heat expected over the weekend.
WLFI Temps
WLFI Planner

Indiana Coronavirus Cases

Data is updated nightly.

Cases: 748654

Reported Deaths: 13714
CountyCasesDeaths
Marion1029801769
Lake553301003
Allen41600690
St. Joseph36919564
Hamilton36487416
Elkhart29332457
Tippecanoe22833225
Vanderburgh22535398
Porter19307324
Johnson18377385
Hendricks17578317
Clark13176193
Madison13105343
Vigo12594253
LaPorte12384220
Monroe12147174
Delaware10941196
Howard10244225
Kosciusko9606119
Hancock8538144
Bartholomew8154157
Warrick7851156
Floyd7759179
Grant7224178
Wayne7153201
Boone6909103
Morgan6732141
Dubois6209118
Marshall6206116
Cass5989108
Henry5891108
Dearborn588778
Noble579486
Jackson508074
Shelby500297
Lawrence4724121
Gibson443793
Harrison440173
Clinton439255
DeKalb438485
Montgomery433390
Whitley405642
Huntington402181
Steuben398159
Miami391968
Jasper385953
Knox375590
Putnam371760
Wabash360482
Ripley346370
Adams344855
Jefferson335384
White328753
Daviess302499
Wells294881
Decatur289792
Greene286085
Fayette284464
Posey273535
LaGrange272672
Scott269455
Clay265147
Randolph244683
Washington244334
Jennings235049
Spencer233931
Starke227457
Fountain217547
Sullivan213943
Owen210758
Fulton200742
Jay200732
Carroll193420
Orange188055
Perry186637
Rush175526
Vermillion173144
Franklin170135
Tipton165546
Parke148716
Pike137934
Blackford136032
Pulaski119947
Newton112536
Brown103943
Crawford102316
Benton100814
Martin91215
Warren83515
Switzerland8068
Union72810
Ohio57811
Unassigned0419

COVID-19 Important links and resources

As the spread of COVID-19, or as it's more commonly known as the coronavirus continues, this page will serve as your one-stop for the resources you need to stay informed and to keep you and your family safe. CLICK HERE

Closings related to the prevention of the COVID-19 can be found on our Closings page.

Community Events