Not too long ago, I wrote an article on Seeking Alpha about selling General Electric (GE) before it fails investors again. I knew there are lots of GE shareholders and I expected to get thrown my fair share of tomatoes. After all, we have all our reasons to hold share of one company instead of another and someone telling you it’s a bad idea may hit the wrong button.
There was something very surprising in the comments thought. Especially coming from supposedly educated investors. Several shareholders commented they would keep GE because they bought it at $6-$9 during the 2008 market meltdown. I don’t really understand why the price they paid 9 years ago, means something today. In fact, the price you pay for a stock doesn’t really matter and I’ll tell you why.
Paper profit is only good… on paper
Ok… so you bought GE at $6 and it’s now trading at $30. The first thing I want to tell you is congratulation. It was a risky guess, but you were right, that’s great! But now, do you still think GE is the best buying opportunity now? Would you buy more GE shares at $30? If the answer is yes, then it’s okay. This means your investment thesis is still good and you believe GE is a strong company that will continue growing.
But if you tell me you bought GE on a momentary and exceptional drop, maybe it’s time to revise your position. Because over the past 5 years and over the past 10 years, GE is underperforming the S&P 500. GE appeared to have become a great investment only for those who bought it during the first 6 months of 2009 while it was trading at its lowest point.
Upon my analysis, my guess is that GE stock will stagnate in the upcoming years as the company isn’t showing strong growth vector and is struggling to increase its dividend every year. Therefore, GE shareholders could sell their shares and cash their profit!
Yeah, but I’m already making 250% profit on this trade since 2009, I can keep it for another 10 years and reap the dividend. True, but imagine if you take your profit and buy another strong company now that will not only pay a strong dividend but will also bring you stock appreciation?
Between you and me, I think MMM and HON will outperform GE in the next 10 years.
Yield on cost is interesting, but there is more
Another point made by GE shareholders was their yield on cost. Let’s say you bought GE at $8. The company now pays a quarterly dividend of $0.24 or $0.96 per share. Based on your cost of purchase, the stock yields 12%. This is quite impressive. Once again, those investors have made a great move back then. But what is happening now?
Now, an investor that had used $10,000 to buy GE at $8, receives $1,200 in dividend per year (12%). His shares also worth $37,500 as the stock price is around $30 these days. With $37,500, all you need to find is a company paying 3.2% yield to receive the same amount of money in dividend.
This changes the whole perspective. If you go out on the market and look for a 12% yielding stock, you will find nothing but risky picks. However, if you look for a company yielding between 3% and 3.5%, you can find plenty of interesting companies. Companies that show better growth potential in the next 10 years than GE. Because unless you have picked GE during its sweet spot at the beginning of 2009, this stock has underperformed the market since the techno bubble in the 2000’s.
A good investment makes your portfolio bigger
I expect two things from my portfolio going forward: #1 increasing its dividend payment each year and #2 increasing its value each year. Because this is what good company do. Therefore, it’s only normal if you keep any stock for a while that your price paid would become ridiculously low.
This is where we all tend to become more lenient. For example, I’m holding on to my Coca-Cola (KO) shares right now as I bought them a few years ago, and they show a nice profit on paper. However, can KO really continue to contribute to my portfolio now? The price has been stagnating for a good 2 years now (if it’s not more!). Let’s not go crazy here and sell any stocks that has underperformed over the last 2 years. My point is to always review your holding and confirm if your investment thesis is valid. While reviewing Coca-Cola, I must find more reason than simply “I keep it because I make X% of profit on paper”. This is not a good reason to keep any company.
So, tell me, why to keep a stock just because you bought it low?
I might have missed the point, but after this post, I really wonder why one would keep an investment simply based on their paper profit or their yield on cost. I think there could be strong opportunities out there, don’t you?