Why GE Is Still a Good Short

Editor's note: Charles Ortel is managing director of Newport Value Partners LLC, which provides independent investment research to professional investors. His letter here is in response to a column on TheStreet.com about where GE's stock price is headed.

By Charles Ortel

As investors do more persistent homework for themselves concerning General Electric's(GE) public disclosures, we believe they will come to appreciate the risks we see for the company in this challenging operating environment.

We do not share Warren Buffett's conviction that America in 2009 will bounce back as it has before. The period from 1945 to 1999 was unique for America. Companies like GE benefitted from strong tailwinds created by opening up of the global market-based economy and from demographic trends that added legions of prime buyers, persons aged 25 to 49, into the mix. Though many stubborn challenges obstructed progress at different moments, progress was sure, especially from 1982 to 1999 as nominal interest rates fell, asset values rose and household net worth steadily increased.

But this new millennium finds America and prime regions of economic activity awash in debt and in excess productive capacity with a very different, aging population mix. We do not believe large, established market leaders have much room to grow profits and free cash flows in their existing businesses. And we are quite certain that highly leveraged ones, whose own customers are also highly leveraged stand on dangerous ground.

Our firm has been analyzing publicly available filings concerning GE since early 2007. While we do read the many words written and uttered by management, our primary focus has been on those stubborn numerical facts that emerge from close reading of GE's detailed financial statements (see www.ge.com for more information).

After careful consideration, we realized that we could get much better understanding of GE's important value drivers by ignoring "segment level" scrutiny practiced by virtually all stock and credit analysts to instead divide GE's core continuing businesses into three main groupings: (1) GE's audited finance businesses, (2) GE's audited total business and (3) everything else.