Jeff Immelt, we learnt this week, is stepping down as chief executive of GE— more than 16 years after he was appointed in November 2000. This prompted a slew of generally very negative judgments, based on GE’s share price. On this measure, his tenure was so unsuccessful that the stock was actually down slightly in price terms since he was announced in the job. It was also the weakest performing of the 30 Dow Jones Industrials components over that period.
The gap with the rest of the market is wide and hard to explain away. Since Mr Immelt was appointed, GE’s stock has lagged behind the S&P 500, in price terms, by some 75 percentage points.
But perhaps the share price is not the fairest way to judge him or even the best way to guide a company. In GE’s previous decade, all under the guidance of the legendary CEO “Neutron” Jack Welch, it outperformed the S&P by 1,000 percentage points.
Mr Welch announced his successor, after a prolonged and public contest between Mr Immelt and two others who would go on to be CEOs of large public companies — James McNerney and Robert Nardelli — only a few weeks after GE stock hit an all-time high. That run looks utterly unsustainable in retrospect.
Part of GE’s strength was its sheer reliability. To borrow a phrase much used recently, Mr Welch was perceived to provide “strong and stable leadership”, with earnings per share, and dividends, growing reliably year after year. The company was fabled for never failing to raise earnings, for always managing to exceed earnings forecasts and for steadily raising its dividends.
At the time, this was taken as a healthy sign that the company was serious about respecting shareholder value and maximising earnings per share. That, in turn, helped its valuation.
But now there is greater understanding that such reliability only happens if a company is being managed carefully with an eye to the short-term future. Careful use of all the leeway that GAAP accounting permits is also helpful. This did not necessarily create a great long-term bequest for Mr Immelt.
GE was also in exactly the right line of businesses at the time as Mr Welch had led a move into financial services and away from the company’s traditional core competencies. This helped to explain both its great performance under Mr Welch and its poor performance under his successor.
One of Mr Immelt’s most consequential decisions was to get out of financial services— and the company has significantly beaten financials in the years since the crisis. It has even beaten the market in those terms.
It is an iron rule of investing that the price at which you buy matters greatly. GE was overpriced in 2000, like many companies, and may be a far more interesting investment now. While markets have been roiled for the last few days, as investors notice that the biggest tech groups look overvalued, that overvaluation still looks tiny compared with the top of the market in 2000.
What should concern them, however, is that Big Tech — companies like Apple, Facebook and Google — now has many of the trappings of GE under Jack Welch. Not only does it give you growth but Big Tech is also now perceived to give you forward momentum and low volatility. That sounds a lot like the perception of GE in its heyday and it is a difficult combination to sustain.
One final point about Mr Welch and Mr Immelt is that they have illustrated another rule of investing. When a CEO is subject to adulation — and Mr Welch was on the cover of plenty of books and magazines — it is a classic contrarian indicator that sentiment towards the company has gone too far.
Peter Atwater of Financial Insyghts suggests that, on this basis, the adulation for several big tech executives at present is cause for concern. Revered executives like Facebook’s Sheryl Sandberg or Amazon’s Jeff Bezos are very talented but, when that talent is widely recognised, it is a sign that the market’s enthusiasm has gone too far.