A Tale of Two Companies.

It was the best of times, it was the worst of times for two companies, Qualcomm and GE.   These two companies have had a challenging year, and both were following a similar path until the first week of November.  On November 1st, Qualcomm closed at $53.46, down 15.7% for the year.  GE was selling for $20.02, down 35.15% for the year.

During the first week of November Qualcomm’s situation improved greatly and GE’s turned for the worse.  Broadcom announced a takeover for Qualcomm at $70 per share on November 6th.   At the time of the announcement Qualcomm was trading for $52 per share so the buyout price was a 25.71% premium to the current price.  The announcement was welcomed news for shareholders of Qualcomm.  Qualcomm has since rejected the overture and it’s currently selling for $66.

A few days later GE delivered horrific news to its shareholders.  They announced a major restructuring, lowered their earnings guidance for 2018, and reduced their dividend 50%.  The news caught most investors flat footed as the shares fell 15% over two days.

An investor who purchased Qualcomm and GE on November 1st saw their Qualcomm shares rise 23.4% and their GE shares fall 13%.

GE is down 41% for 2017.  GE is 125 years old, founded by Thomas Edison, and it has morphed multiple times so I’m pretty sure it will recover; however, it will take time.   Since 1962 GE has finished a calendar year with double digit losses ten times.  It dropped 47% in 1974, 37% in 2002, and 54% in 2008.[1]

These two companies share some similar metrics (see chart below).   Both companies held a Morningstar Fair Value rating of four (one being overvalued, five being undervalued) as of November 1st.  The largest shareholder for both companies is Vanguard.  The S&P rating for Qualcomm is A while GE’s is AA-.  The yield for Qualcomm was 4.62% and GE’s was 3.91%. The historical PE ratio for Qualcomm is 16 and GE’s is 15.

In 2015 Qualcomm had free cash flow of $4.5 billion, GE’s was $12.5 billion.   Today the free cash flow for Qualcomm is $4 billion and GE’s has gone negative. The debit level for Qualcomm is 36%, GE’s is 46%.  Institutions own 79% of Qualcomm and 61% of GE.

Of course, no one can predict the price movement for stocks so what can investor do when stocks start to diverge from your price target?

  • Diversify. Diversifying your investment holdings may help you increase your odds of finding winners while potentially limiting your losses from the losers.  To be diversified you should own at least 30 companies with some studies suggesting a minimum of 1,000![2]   My recommendation is to limit each stock holding to 1% to 3% of your total investable assets.
  • Plan. A trading plan will help you deal with the ups and downs of your investment portfolio. Setting a price target before you buy a stock can remove the emotions when it rises or falls to your predetermined sell level.
  • Buy Funds. A better alternative for most investors is to purchase mutual funds or exchange traded funds (ETFs).  These funds will own hundreds, if not thousands, of companies and give you instant diversification.  For example, the Dimensional Core Equity I Fund owns over 2,600 companies.
  • Review.  I recommend reviewing your stock holdings quarterly to make sure you still want to own the company.  If the answer is yes, let it ride.   If no, sell it and move the money into a new investment.

Here is a side by side comparison of Qualcomm and GE as of November 1, 2017.

Category Qualcomm GE
Morningstar Fair Value Ranking 4 (1 is lowest, 5 is highest) 4 (1 is lowest, 5 is highest)
Average PE Ratio 16 15
Fair Value Price Target $68 $26
EPS Projection $3.40 $1.75
Average Dividend Yield 3% 3.5%
Current Price $53.46 $20.02
Current Dividend Yield 4.49% 4.80%
S&P Rating A AA-
Debt Level 36% 46%
Institutional Ownership 79.32% 61.17%
Largest Shareholder Vanguard Vanguard
Price Target (PE x EPS) $54.40 $26.25
Price Target (Dividend/Yield) $80 $27.42
Free Cash Flow – 2015 $4.53 Billion $12.5 Billion
Price on 11/15/2017 $66 $18.25

As you build your investment portfolio focus on your plan and diversification.  Reviewing your plan and investment strategy on a regular basis is wise counsel and it may require you to be patient at times.

Rejoice in hope, be patient in tribulation, be constant in prayer. ~ Romans 12:12

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm.  For more information please visit www.parrottwealth.com.

November 15, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.

Data:  Morningstar, Value Line & Fast Graphs.



[1] Morningstar Office Hypothetical Tool, GE stock return – 1962 – 2017.

[2] https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp, By Jason Whitby, website accessed 11/15/2017.

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