The first news story in my inbox this morning was that General Electric’s CEO, Jeff Immelt, was stepping down in favor of John Flannery, a 30-year GE veteran who had most recently led the Medical Devices business.
John Flannery, new CEO of General Electric
The stock received a nice pop in pre-market trading which has translated into good gains during the regular session, and TV pundits and analysts are busy discussing the impact of Immelt’s departure on GE’s stock price – one stating that GE needed an infusion of “new blood” for its stock to rise.
I have been promising a review of our GE valuation, and will publish a report to Framework members this week, but also wanted to make a brief comment about behavioral factors in investing in the case of GE.
A few years, I read a brilliant book by Cal Tech professor Leonard Mlodinow called The Drunkard’s Walk.
In the book, he makes the point that much of what we perceive as skill in business, investing, and sports is statistically indistinguishable from random action.
In my opinion, GE’s management is the poster child of the effect about which Mlodinow writes.
Jack Welch – remembered as a hero by many GE investors because they rode GE’s stock price up during a long bull market – arguably set the groundwork for GE’s stock price collapse during the financial crisis.
Immelt took over as CEO four days before the World Trade Center attacks and scrambled to reposition General Electric after GE Capital Corp’s hidden risks nearly pulled the company down in 2008.
Some criticize Immelt for not selling off GE’s non-core assets sooner, but anyone knows that it’s easy to buy something, but often more difficult to sell it.
Trian, an activist investment fund with a large stake in GE, may have pushed Immelt to resign due to recent weak stock performance, but over the longer term, the market is a weighing machine and will weigh GE’s ability to generate cash on behalf of its shareholders, no matter who holds the title of CEO.
Resources
- Judging GE’s Jeff Immelt Versus Jack Welch (Bloomberg). Barry Ritholtz, one of my favorite market curmudgeons wrote a terrific article comparing the two CEOs, explaining the points I make in this video in greater detail.