2010 Becomes The Year of the Conglomerates (GE, MMM, HON, UTX, BRK-A, SPY, DIA)

2010 may be a directionless year for the stock markets so far, but shares of conglomerates are outperforming and more upside is expected.  The five largest conglomerates we follow are all higher for the year.  We took a look at General Electric Co. (NYSE: GE), 3M Co. (NYSE: MMM), Honeywell International Inc. (NYSE: HON), United Technologies Corp. (NYSE: UTX) and Berkshire Hathaway Inc. (NYSE: BRK-A) to see which conglomerates were outperforming and why.  With a mixed bag between the performance of the SPDRs (NYSE: SPY) and DIAMONDS (NYSE: DIA), the performance so far stands out significantly for all of these large companies.

Conglomerates are supposed to offer safety because of their diversification.  That is the theory, and the theory seems to be working so far in 2010.  They are also generally good for screens when it comes to value investors and dividend investors.  We put together a small table here for comparison of the stocks and the performance.  If there are any discrepancies over the “listed” December 31, 2010 versus the papers on official closes, it is because the figures below have accounted for the dividend effects in the stocks.  We have also shown the year-to-date gains up to the close of Thursday, July 29, 2010 and we even gave an implied upside target to the consensus analyst price objective in the shares.

We have provided price objectives and color on each conglomerate in the field with comparable data on performance, expected performance, dividends, earnings color, and more.

Company 12/31/2009 7/29/2010 YTD Gain Goal/Target
General Electric $14.94 $16.15 8.10% $20.50
Honeywell $38.64 $42.72 10.55% $51.28
3M $81.62 $86.34 5.78% $102.43
United Tech $68.56 $71.15 3.77% $82.07
Berkshire Hathaway $99,200 $116,866 17.80% $131,000

Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) is not always considered a conglomerate because of its vast insurance operations and its investment activities.  If GE is not a conglomerate now, we’d like to hear how that is not the case.  Its new BNSF acquisition in rail took it far more into the status of an operating conglomerate with operations in rail, insurance, home building, retail, manufacturing, private jets, and more.  Gone are the days that Berkshire might be considered just a mutual fund.  You can of course track Buffett’s full stock holdings here.

The big changes that came this year after that BNSF deal are also what made it the winner of performance so far in 2010.  It is now in the S&P 500 Index and Russell Indexes, it has split is B-shares to a level that the public can now invest in it, and Warren Buffett has still not named a successor to the empire.  There is also still no dividend, making it the standout name of conglomerates and dividends.  So far this move has generated returns of 17.8% for those holders who owned it at the end of 2009.  The consensus analyst price target is $131,000.00, implying that there is still a projected upside of 12.1%.

General Electric Co. (NYSE: GE) may be down from its highs as its shares went as high as $19.70 in the last year before the pullback came.  The company made it fine through earnings season this July and is managing itself far better than when the rumors and speculation were rampant in early 2009 that the Great Recession could actually have a chance of chewing up GE.  It has shrunk its finance role.  The company is in a deal to get rid of the NBC-Universal dominance with a giant stake sale.  Jeff Immelt told us in an exclusive interview that GE would look at some bolt-on inorganic growth opportunities, and it is managing its cost structure aggressively.

Things are even good enough that Jeff Immelt green-lighted the dividend hike for an implied dividend yield now of 3%.  It has also pledged to immediately begin repurchasing shares of its common stock.  With a gain of 8.1% year to date, GE ranked third of the five conglomerates in share performance.  The kicker and the wild card in the scenario is that analysts actually have GE in the highest light here for upside to its objective price target for a year out.  The consensus analyst price target is $20.50, implying upside of 26.9% from today.  Since this lost the most during the Great Recession, it is not shocking that it still has the most implied upside from research firms.  It is probably going to be a long time before we ever discuss those old $40 prices again, but for now this is the one that analysts have the most implied upside expectations in.

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