Buffett's bet on GE in 2011

The investor has a considerable interest in the company, which expects growth in its core business next year.

By TheStreet Staff Dec 17, 2010 12:48PM

Warren Buffett. Image credit: © Chip East/ReutersBy Don Dion, TheStreet

 

General Electric (GE) looks promising. Upward action from this U.S.-based conglomerate will mean a nice payday for investors in 2011.

 

This week, GE CEO Jeff Immelt provided an optimistic forecast. In comments made to investors during the company's annual meeting, he explained that, though demanding, the steps taken after the global economic crisis have helped GE get back on track. He expects core businesses to grow in 2011.

 

Immelt pointed to China as a promising region for the company in the new year, saying the company expects to see high-double-digit growth.

 

By paring down its financial branch, GE Capital, and refocusing on its industrial roots, the company has already made great strides.

This fall, executives offered an optimistic outlook for M&A, explaining that over the next few years the company could spend about $30 billion on acquisitions. Following through with that forecast, the company made a number of notable purchases in the closing months of 2010, including the $1.3 billion deal to acquire U.K-based Wellstream, announced earlier this week.

 

One investor who likely looks forward to GE's ongoing return to prominence in the new year is Berkshire Hathaway (BRK.A) chair Warren Buffett.

 

Buffett and GE have developed a well-documented relationship in recent years. In the throes of the 2008 financial meltdown, the Oracle of Omaha lent a hand to the struggling conglomerate, providing $3 billion in return for preferred stock and warrants to buy $3 billion in GE common shares at a set price. Buffett's investment played an instrumental part in saving the company when it was on the brink of catastrophe.

Although the company has recovered, its stock hasn't seen the type of dramatic upward trajectory that fellow Buffett-held Goldman Sachs (GS) has seen.

 

Nevertheless, the world-famous investor has remained faithful and held on to his GE preferred shares. This equity has not only provided him with a front-row seat to the company's resurgence but also a well-received annual 10% dividend.

 

There is a good chance that General Electric will end up being another home run for Buffett in 2011. ETF investors may find funds including the Vanguard Industrial ETF (VIS), iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) and the Industrial Select Sector SPDR (XLI) attractive ways to follow the Oracle's lead.

 

These funds are notable for their heavy exposure to General Electric. In all three, the company is listed as the No. 1 holding, accounting for 12%, 11% and 10% of VIS, IYJ and XLI, respectively.

 

Aside from GE, however, all three boast heavy exposure to other notable industrial household names, including 3M (MMM), Caterpillar (CAT) and United Technologies (UTX). These companies will also benefit in 2011 as the global economy continues to recover.

 

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