General Electric Co. insiders were convinced: There must be a mole. How else did Stephen Tusa know?
With the conglomerate in crisis, the JPMorgan Chase & Co. research analyst had an uncanny knack, time and again, for uncovering deep problems before they were public. For years, his research had zeroed in on issues both broad, like management credibility, and detailed, like a flawed fan blade inside GE’s turbines, that kept proving prescient.
His reports, often lengthy and skeptical, warned JPMorgan clients to dump the stock, and seemed to be gaining more influence with each new volume.
Inside GE and its boardroom, as a succession of management teams tried to wrap their arms around problems that kept spooking investors, Mr. Tusa’s calls became a source of speculation.
The board and advisers would scrutinize Mr. Tusa’s reports. GE even launched a hunt for leakers, a board member questioned JPMorgan about the research and the bank conducted an internal review, people familiar with the matter said.
As General Electric ’s profits and stock price shriveled, erasing some $200 billion of market value in 2017 and 2018, Mr. Tusa’s dour attitude won more influence among investors. One former senior GE executive said Mr. Tusa’s reports were painful to read, but were thorough and largely correct. “I tip my hat,” this executive said. “At the end of the day, our problem is not Steve Tusa.”
It seems that every decade Wall Street anoints another star analyst. There was Mary Meeker and her coverage of internet stocks during the 1990s dot-com bubble. More recently, Meredith Whitney gained fame for her warnings on Citigroup and other banks during the 2008 financial crisis. Today, few analysts can claim the name recognition and influence that 44-year-old Mr. Tusa has built around GE.
Wall Street research has long come under fire over perceptions of cozy relationships with companies, especially when it comes to big investment-banking clients like GE. Mr. Tusa has been an outlier—which he’s quick to point out—and moved the stock in the process.
Over the past two years, Mr. Tusa has cut his price target on GE 10 times, to $5 from $27. Each time he’s done so, the stock has underperformed the S&P 500 that day, by an average of more than 3 percentage points. When he upgraded the stock last December to a lukewarm “neutral,” the stock rallied 7%, as people hoped he was calling the bottom.
That hope was short-lived. Before U.S. markets opened April 8, JPMorgan issued an alert that Mr. Tusa was downgrading GE again. The report—over 100 pages—highlighted GE’s challenges and risks but the thrust was that the stock price had gotten ahead of reality. GE’s stock slid 5% as the broader market rose.
With the stock beaten up and Mr. Tusa remaining negative, his opinion remains at odds with new GE leaders who are promising a long turnaround. Some people who credit the analyst for correctly seeing the decline of the company are beginning to question if he’s too committed to his negative view.
The bearish turn on GE was a decade in the making.
As an analyst, Mr. Tusa has followed GE since 2001. A formative event was when another conglomerate, Tyco International Ltd. , collapsed under the weight of an accounting fraud in 2002. The scheme was missed by analysts, and it taught Mr. Tusa to have a healthy skepticism around the companies he covered, according to a person close to the analyst.
In those years, GE struggled to find the regular growth delivered in the decade before. It spent billions of dollars on acquisitions and share repurchases, and continued its reliance on the financial-services business that would almost destroy the entire company in the financial crisis.
In 2008, Mr. Tusa’s downgrade to “neutral” eerily described the internal problems that would contribute to GE’s collapse a decade later. “It would appear as though accountability for hitting targets is the top priority, and some managers might be chasing earnings,” he wrote. “We also think the high bar for success in such a competitive environment could create a scenario in which bad news is not tolerated, making necessary communication with senior level managers a challenge until it’s too late to fix.”
Studies have found analysts to be more positive when they are issuing opinions on larger companies, when they cover many companies, and when the companies generate high-investment banking fees. Mr. Tusa has managed to buck all those trends, said Mark A. Chen, a finance professor at Georgia State University who has studied the investment-research industry.
Mr. Tusa covers 21 industrial companies and JPMorgan has collected an estimated $370 million in banking fees from GE since 2010, according to Dealogic, the most the conglomerate has paid to any investment bank over that period.
Prof. Chen found those biases are so prevalent that investors have baked them into their reactions: A negative call, like Mr. Tusa’s, by an analyst under those circumstances tends to move the stock more. “Clearly this analyst broke the mold in analyst optimism,” Prof. Chen said.
A prime example: In 2015, as JPMorgan’s bankers advised the conglomerate on selling much of its financial-services business, Mr. Tusa had to halt publishing but he continued to do research. Upon returning in May 2016, he surprised investors with an “underweight” rating, JPMorgan’s version of a “sell” rating.
At the time, GE’s problems hadn’t yet emerged and the stock was trading close to $30. In the two years that followed, GE slashed its dividend twice, changed its CEO twice and decided to break itself apart, selling off major units. Shares trade around $10 today.
Despite the success of his “underweight” call, Mr. Tusa was constantly questioning the rating in the first year when the stock stayed near $30, said people close to the analyst.
“He had a lot of nervousness around that,” said Paul DeGaetano, CEO of a cosmetics company, who has known Mr. Tusa since they played ice hockey three decades ago. Friends and acquaintances in the finance industry criticized his aggressive stance in that first year. “It doesn’t surprise me that he would be the ringleader of this sort of thing,” he said.
Charles Stephen Tusa Jr. grew up in Greenwich, Conn., one of the country’s wealthiest towns, home to hedge-fund managers and private-equity partners. As a child, he used to ride bikes with Ian and Shep Murray, who went on to found preppy clothier Vineyard Vines. He attended the elite Brunswick School, following the footsteps of his father Charlie, a founding partner of a prominent law firm in town.
A political science major at Dickinson College in Pennsylvania, Mr. Tusa has said he learned finance on the job after joining JPMorgan in 1998. It wasn’t his first career choice. His dream was to play center for the New York Rangers and Wall Street hasn’t tamed his devotion to ice hockey. In 2014, as the Rangers were making a run in the playoffs, Mr. Tusa grew a mullet. He still laces up his skates regularly with multiple leagues, getting in more than 20 games over the winter. On days when GE is dropping major news, he has worked from the bench.
At GE, there has long been a suspicion that Mr. Tusa had a network of contacts inside the company that fed him information, according to former executives and people familiar with the board. The detailed knowledge of the company in his research notes was seen by some as being suspiciously accurate.
GE conducted a search for leaks and Ed Garden, a GE director and co-founder of activist investor Trian Fund Management, discussed the issue with JPMorgan, according to people familiar with the matter. JPMorgan executives reviewed Mr. Tusa’s work and found nothing the bank was concerned about, the people said.
In looking for leaks, no one was above suspicion, even board members were commanded to keep their mouths shut, the people said, and GE took extra steps to keep any developments under wraps.
A culture that disdained bad news contributed to overoptimistic forecasts and botched strategies
Jeffrey Immelt, the longtime boss at General Electric Co. , was a polished presenter who held court each year at a waterfront resort off Sarasota, Fla., where industrial executives and Wall Street listened for his outlook on the conglomerate.
“This is a strong, very strong company,” Mr. Immelt said at the event last May.
.. GE’s precipitous fall, following years of treading water while the overall economy grew, was exacerbated, some insiders say, by what they call “success theater.”
Immelt and his top deputies projected an optimism about GE’s business and its future that didn’t always match the reality of its operations or its markets
.. “The history of GE is to selectively only provide positive information,” said Deutsche Bank analyst John Inch, who has a “sell” rating on the stock. “There is a credibility gap between what they say and the reality of what is to come.”
.. “GE itself has never been a culture where people can say, ‘I can’t.’ ”
.. GE once had the highest market value of any U.S. corporation. Its alumni have gone on to run companies such as Boeing and Chrysler.
.. Few knew just how badly ailing the American icon was. Even GE’s board didn’t realize the depth of problems in the biggest division, GE Power, until months after directors had replaced Mr. Immelt
.. A spokesman for the former CEO pointed to his decision to purchase $8 million worth of GE shares in 2016 and 2017. That included 100,000 shares in mid-May at a price roughly twice today’s.
.. But Mr. Immelt didn’t like hearing bad news, said several executives who worked with him, and didn’t like delivering bad news, either. He wanted people to make their sales and financial targets and thought he could make the numbers, too, they said.
.. Over the past three years, GE spent more than $29 billion on share repurchases, at an average price of almost $30, twice the current level. That included billions of dollars spent less than a year before GE suddenly found itself strapped for cash last fall.
.. Trian Fund Management LP, which invested $2.5 billion in GE in 2015, wanted it to buy back even more stock. The activist investor urged the company to borrow $20 billion for repurchases (which it didn’t do), based on a belief that the profits Mr. Immelt was promising would send the stock soaring when they arrived.
.. Instead, at Mr. Immelt’s retirement in August the stock was below its level when he took over 16 years earlier. Including dividends, GE gained 8% with Mr. Immelt at the helm, while the S&P 500 rose 214%. Since he stepped down, the stock has lost about 43%, erasing almost $94 billion in market value
.. Instead of $2 a share GE now projects $1 to $1.07.
.. Several directors discussed in November whether the entire board should be fired
.. Jack Welch, delivered steady profit growth and sent shares soaring in the 1980s and ’90s by striking deals and aggressively slashing costs and jobs. Mr. Welch also built up a huge lending business called GE Capital that for years generated outsize profits—but nearly sank the company during the financial crisis on Mr. Immelt’s watch.
.. Results were strong at two of GE’s big units, aviation and health care (medical equipment).
.. Acquiring companies that help drillers pump and transport fuel, he had GE spend more than $14 billion over 10 years, most of it based on higher oil prices than today’s.
.. Mr. Immelt’s optimism was part of the problem, according to some people close to the situation. They said he told the board that management had identified risks in the power business, yet downplayed them. The probability and risk were way off, one said.
.. Lisa Davis, the U.S. chief of Siemens, said the German company’s executives “have seen this decline coming for the last several years.” So Siemens had reduced its capacity in its power business, she said, while GE bought more.
.. According to former executives, the upgrades meant lower service fees for customers, in exchange for one-time upgrade costs, meaning that future sales were being pulled forward.
Apple will not be the only multinational that will soon bring back gigantic profits to take advantage of new low repatriation rates. Microsoft holds $146 billion in overseas earnings, Pfizer $178 billion, General Electric $82 billion, Alphabet $78 billion, and Cisco $71 billion, according to estimates from the Zion Research Group. The total stash is about $3 trillion — by one measure nearly three times what it was just a decade ago.
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