Creative Destruction Fund

General Electric is a poster child for creative destruction. The company has been adept historically at riding waves of technological innovation. I’ve followed GE closely for many years. World headquarters is a short 15 minute drive from my office and I’ve used that convenience to meet with management on a regular basis.

General Electric is special for many reasons. One of the hallmarks of the company - something that no other company on the planet can claim is this: It is the only stock from the original Dow Jones Industrial Average launched in 1896 to have survived. The other 11 stocks- which were considered the bluest of blue chip companies - are gone. History! I am fond of telling folks that GE survived because it became more general than electric. Indeed, GE has been a master at adaptation - the key ingredient to business survival. In the past, leadership and GE have gone hand in hand.

Which brings us to the situation today. Something is wrong with GE. That’s the message you get when looking at the performance of the company’s stock price over the past year (see chart below). GE’s stock has fallen 25 percent over the last twelve months and is seriously lagging the market (proxied by the Dow Jones Industrials Average - DJIA).

Management, under the helm of CEO Jeffery Immelt, has lost a great deal of credibility with analysts and investors over the past year. Credibility and trust go hand in hand. Once you lose it, it’s very hard to earn it back.

From what I can tell, there is nothing fundamentally wrong with GE’s long-term business strategy. The company aims to be in businesses that have strong expected returns on invested capital relative to the cost of capital, and also those that have large moats (a strategy near and dear to the hearts of Messrs. Buffett and Munger at Berkshire Hathaway). The problems appear to be associated with poor execution. Several of the company’s core businesses don’t seem to be executing very well. We all know that GE is a huge company with lots of moving parts that are difficult to manage. That said, the buck stops with CEO, Jeffrey Immelt.

I want to believe that Jeff has what it takes to tackle whatever problems are facing GE. But I have to say that I haven’t seen anything recently to offer any encouragement. I want to be long GE’s stock, but I cannot see any reason to own it right now - especially since there are so many other companies out there tearing the cover off the ball.

Just for the record, I feel the same way about GE today as I felt about Dell during Kevin Rollin’s reign. I was hoping Michael would get back into the CEO role and turn the company back into the powerhouse it was in the 1990s. It was painful to sell Dell’s stock when I did, but I had lost confidence in Kevin. I bought Dell’s stock shortly after Kevin’s departure when Michael came back. I did the same thing with Apple when Steve Jobs came back as CEO.

There’s nothing quite as good from an investor’s perspective as a great CEO sitting on top of a great business (or businesses) that is significantly undervalued by the market. You just can’t beat those investment opportunities. Those are what we call “fat pitches.” When you see fat pitches, you take a good, hard swing (i.e., make a concentrated bet). If all works out as planned and you connect, you watch the ball fly out of the park and tally up the runs.

When thinking about GE, I can’t help but wonder if Jeff has what it takes to get the job done. Truth be told, I wouldn’t be surprised to see a new CEO at GE within the next year or so. I’m not saying this is going to happen. All I am saying is that I wouldn’t be surprised.