Here are seven conglomerate stocks that offer capital gains potential over the next few years. Three other conglomerates we follow remain on ‘hold’, including General Electric whose turnaround will likely take more time than previously thought—and SEC investigations will also weigh on the stock for the near term.
Since we last reviewed conglomerate stocks in October 2017, the 10 stocks we include in The Back Page feature are down by an average of 6.7 per cent. This lags the 0.5 per cent rise in the S&P/TSX Composite index since then.
Key stocks Atco Ltd. (TSX—ACO.X), Fortis Inc. (TSX—FTS; NYSE—FTS), Power Corp. of Canada (TSX—POW), Toromont Industries (TSX—TIH) and Walt Disney (NYSE—DIS) remain buys for rising dividends and long-term share price gains.
We downgraded General Electric (NYSE—GE) to a hold in December, 2017. It remains a hold (see below), for a high current yield and a potential share price recovery.
Non-Key stock Fairfax Financial Holdings (TSX—FFH) remains a buy for share price gains and modest dividends that rose in 2017. Power Financial (TSX—PWF) remains a buy for share price gains as well as high and rising dividends.
Brookfield Asset Management (TSX—BAM.A; NYSE—BAM) remains a hold. It looks overpriced in relation to its earnings. Onex Corp. (TSX—ONEX) remains a hold if you can accept volatile and unpredictable profits.
General Electric remains on hold
Shares of General Electric are down just over 20 per cent since we placed the stock on hold in December, 2017. Recent weakness is due to the revelation in January that the US Securities and Exchange Commission (SEC) has launched an investigation into the company’s insurance reserve, and another one into its contract asset accounting practices.
General Electric is a global conglomerate, with products and services ranging from aircraft engines, power generation and oil and gas production to medical imaging, financing and industrial products.
The SEC investigations come in the wake of a disappointing financial performance last year. For the year ended Dec. 31, 2017, GE’s core (industrial operating plus verticals) earnings per share before restructuring charges were US$1.05, down 29.5 per cent from $1.49 in 2016. The decrease was driven by a 16-per-cent decline in profit at the industrial business to US$14.7 billion. In particular, earnings declined in three of the industrial business segments: at the power segment, driven by negative cost productivity; at the oil and gas segment, due to restructuring costs; and at the transportation segment, driven by lower volume and negative cost productivity.
GE’s EPS is expected to decline further in 2018, to $0.96. Based on this amount, the stock’s price-to-earnings multiple of 14.3 would seem reasonable. But the company’s turnaround will likely take more time than previously thought, and the SEC investigations will also probably weigh on the stock in the near term. Chief Executive Officer John L. Flannery will have his work cut out for him these next few years.
General Electric remains a hold.
This is an edited version of an article that was originally published for subscribers in the March 30, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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