My partner David Faber and I used to joke around in the late 1990s about what stock was the "key" to this market. He wanted to know what mattered -- what people were really focusing on, in the same way a linebacker might key in on a quarterback's eyes. My keys sometimes were the same for months at a time. There was the run in Yahoo! (YHOO), which I said was historic right up until the company paid $5.7 billion in stock to buy Mark Cuban's company, Broadcast.com, to provide Internet radio. It was kind of a watershed moment -- the benchmark of the overpaying insanity that defined 1999. Before that it was Pfizer (PFE), which rallied like a small-cap biotech right into the launching of Viagra.
Most recently I said the keys to this market were Tractor Supply (TSCO), Lumber Liquidators (LL) and Ulta Salon (ULTA). These were facetious keys, to a degree, because they were about high-growth retailers that wouldn't quit, propelled by momentum-buying mutual and hedge funds that didn't know how to quit. Lumber Liquidators and Ulta Salon have hit walls, and among the factors involved has been the killer of potentially slowing growth. Tractor Supply continues to percolate as a play on farmers buying their products from a cheaper, national chain, rather than their local feed-and-grain.
But today I shocked David when I said the key to this market right now, right here, is General Electric (GE). I said GE because this morning an Oppenheimer analyst downgraded the stock from Buy to Hold, ostensibly in a piece that said that the company's restructuring is now in a transitional period -- which I think is Wall Street speak for a stock that's run out of gas. At this point, the research piece implies, the company's ongoing minimizing of finance and maximizing of industrial are baked into the stock, so it is time to move on.
Why is this stock the key to the market's next move? Because if this analyst is right with his downgrade, it means we are at the end of the period of industrial outperformance that began with the fourth quarter's strong labor reports. Stocks like General Electric have been leaders for some time, and although GE has not kept pace with the likes of such companies as 3M (MMM) or Boeing (BA), it did have undeniable momentum going into year-end.
GE sports a 3.2% dividend yield, and the company is transforming itself from its prior incarnation as a true financial dog with an industrial tail to a new role: an industrial powerhouse dominated by energy. So this one, to me, seems to define this moment. It epitomizes which stocks can go higher if the economies around the world get better -- and this is precisely my thinking behind holding it in my Action Alerts PLUS charitable trust. If the analyst is right, we are going to see some of these gains repealed, and the stock market is going to be a very rocky place until new leadership is found.
Right now it's not clear who will be correct, as there are plenty of crosscurrents. Have autos slowed? That would be terrible for the industrials. The Baltic Freight Index, so sensitive to Chinese growth, has been weak for the last few weeks. Does this send us a negative signal that GE, a company with big Chinese contracts, could slow down? We have to be attentive to a host of commodities, as well as the labor report, in order to stay close to this international industrial conglomerate.
My bet is that this downgrade is premature, perhaps way premature, and that GE is going to return to the greatness it had when its stock was priced in the $40s. However, this time around I suspect the gains will be more sustainable. Yep, the Oppenheimer analyst is wrong, in my humble opinion, and I am putting my charitable money where my mouth is. I think you should, too.