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Investing: Looking At The Dow, General Motors and General Electric

Read more articles on Finance and Cars and Trucks.

September 28, 2006

Posted by neillevine

About This Editor: I am a writer. Have been writing for other sites, but expect to do most of my future work HERE! My expertise extends from the esoteric such as burning hydrogen to the unpredictability of the stock market and my writing makes me a jack of all trades and exasperated master of none. I have had some influence over national wildfire and water policy and there are hints of a change in energy policy, BUT as Samuel Goldwyn once said, "A verbal promise is not worth the paper it is written on."

         

The Dow Jones Industrial Average is near 11,730, its all time high. This means that some typical investor who theoretically bought some hypothetical shares of stock tied in value to the average at almost any date in the past is ahead of the game, since he bought his basket of shares at an obviously lower price. Anyone buying such a stock sample at or above the old record is taking more of a risk. This does not mean he cannot make money. Just that the investing odds are less in his favor and, as the market goes higher, the lower his rate of return is going to be in comparison to previous market prices .

There are thirty (30) components to the Dow. A look at two of them gives an idea of the potential risks and rewards involved in buying an average stock.

General Motors is a Dow member. Right now, the company is losing money. Worker buyouts to reduce costs have been expensive. The company is losing ground to Japanese auto makers because fuel efficiency is more appealing to drivers, an area where Toyota, the leading Asian car maker, has a clear lead. There are rumors or a merger or some other sort of linkup with Renault and Nissan, but as of the time of the posting of this article nothing official has happened. Any combination of the three companies is likely to save money in administrative and purchasing costs, which should translate into profits. At around thirty-two dollars GM is near its high for the year, but far below its all time high and at three hundred eighty five dollars per share in gross sales revenue, a theoretical profit of two percent on sales would show up as more than seven dollars per share, a low price to earnings ratio, meaning there is upside potential if the company has turned itself around. The current claim is that a hypothetical combination of the three companies would save ten billion dollars translating into very nice earnings per share, if achieved.

In comparison, General Electric at around thirty five dollars a share is also below its all time high of about sixty dollars per share in 2000, but has been making money steadily and has a far greater market capitalization even though it is a more complicated company with divisions in such diverse industries as aircraft parts, entertainment, medical products and finance.

So its nice to contemplate national prosperity but the real problem is figuring out if positive economic developments will continue and be reflected in the stock market as evidenced by the Dow Jones Industrial Average.