Have investors lost interest in General Electric after the departure of Jack Welch? It certainly appears so. A recent article in Fortune Magazine, For GE, Breaking Up is Hard To Do, indicates that investors have lost their enthusiasm for the once high-flying behemoth.
One of the conclusions in the article that states “GE’s changing revenue sources have failed to satisfy investors” is unfortunately off base. The article shows a graph of how cumulative returns since 2000 have actually declined slightly.
It’s not revenue as the article implies, but rather high valuations that have failed to satisfy investors. Value Line indicates that GE’s valuation in 2000 was 40.1 times higher than the company’s earnings. From a price of close to $60 per share in 2000 to a price of $24 recently, the poor performance in the stock price has less to do with changing the revenue mix and more to do with high starting valuations in 2000.
Scaring Off Investors with High Valuations
A high opening valuation will reduce a stock’s price performance. A low valuation will increase the chance of a stock escalating in price.
Unfortunately for GE, stock prices have routinely under-performed as valuations in 2000 simply started off too high to entice investors.
When a company’s beginning valuation is in alignment with earnings, capital appreciation will be highly correlated with the company’s earnings growth rate.
GE may diversify its revenue base or concentrate it even more. But starting at the current valuation will unlikely satisfy investors moving forward.