January 2017. A once-great American industrial conglomerate is trading at what looks like a reasonable P/E of 20x with a 3.2% dividend yield. Analysts say 'undervalued.' But the company has deeper problems. Over the next 3 years, it will cut its dividend, get dropped from the Dow, and fall 70%. At every step, it 'looks cheap' — until the next shoe drops.

What This Scenario Teaches

Industrial conglomerate. P/E of 20x, dividend yield 3.2%. New CEO Jeff Immelt. Analysts: 'shares undervalued, strong buy.' Stock looks cheap after years of underperformance.

Q1 earnings miss. CEO says 'temporary headwinds in power division.' Dividend maintained at $0.24/quarter. Analysts: 'buy on the dip, fundamentals intact.'

Power division struggling — losing market share to renewable energy. CEO Immelt suddenly retires. Large write-down announced. New CEO John Flannery pledges 'simplification.'

Flannery: 'We are taking aggressive action.' Power division worse than disclosed. SEC investigation opened. Dividend under review. -31% YTD. 'Now it's cheap at 14x P/E?'

DIVIDEND CUT 50%: $0.24 → $0.12. SEC expands investigation. Power division may need $15B write-down. Stock -10% in one day. -47% from Jan 2017.

More write-downs. Baker Hughes investment losing value. Insurance unit has $15B funding gap. Analysts downgrade. 'Is this the bottom at 11x P/E?'

DROPPED FROM DOW JONES after 110 years. Symbolic end of an era. Power division market: dead. New CEO Larry Culp hired. Will the third CEO in 2 years turn things around?

Power division may need a bailout. Debt downgraded near junk. Bankruptcy concerns surface. $23B goodwill write-down announced. -69% from Jan 2017. 'Finally cheap?'

Culp outlines 'radical simplification': selling healthcare, aviation finance. Asset sales provide cash. But is the core business investable? -75% from peak.

Healthcare division sold to Danaher for $21B. Cash infusion. Stock bounces. Analysts cautiously positive. Has the bleeding stopped?

Q2 earnings: 'better than feared.' Free cash flow guidance raised slightly. Some optimism — maybe Culp can engineer a turnaround. -67% from Jan 2017 peak.

New accounting concerns from renowned short-seller. Q3 miss again. DIVIDEND ELIMINATED entirely. Power division: 'structurally challenged for years.' -73% from peak.

Year-end bounce. Aviation division strong (pre-COVID). Aviation represents last great hope. -66% from Jan 2017. How much have investors lost averaging down over 3 years?

Learn to recognize when 'cheap' just means a stock keeps falling

The Value Trap