General Electric Capitulates Offering Interim Buying Opportunity

March 28, 2018 6:02 pm

Pin It

It has been one hell of a year for General Electric (GE) and its beleaguered shareholders. Bullish investors have suffered mightily watching their funds evaporate as the stock fell 65%, punishing anyone in the name.

Yesterday, the Wall Street Journal published a relatively bearish article that allowed traders to pile on to the downside with the stock breaking the $ 13 level and trading down to $ 12.70. That matched a low not seen since the heart of the financial crisis.

I read the article but did not see a real reason to spin it as a sell sign. There was no new news there. In my view, this is the type of situation that happens when a stock is capitulating and media outlets pile on, kicking a company when it is down.

As I watched GE hit $ 12.70, I thought to myself, is this company needing a loan from Warren Buffett? No.

Are we in a financial crisis with a contracting economy? NO.

Is sentiment as bad as I have ever witnessed in GE? YES. I then pushed the buy button and added to an upside down position with reservations.

Here are few questions for the average investor to keep it simple.

  • Are conditions better for GE now than they were in 2009? I think the answer is yes.
  • Does GE have more or less shares outstanding than 2009? It has less shares outstanding.

Here is a chart showing the share count for interested investors.

Source: GE macrotrends

As you can see, the share count was over 10B in 2009, it is now around 8.6B shares.

  • Is the global market in which GE operates in recession? No, as a matter of fact, the world economy is growing in sync for the first time in over a decade.
  • Is the negative news overdone? Are we dealing in reality or is the market trading on fear?
  • Is there a positive catalyst that can take the stock higher? That is a little more difficult question to answer. For me, the answer is maybe.

GE has been a huge disappointment for many years. There have been hundreds of articles over the last few months about GE and all of its problems.

I would like to take a moment to focus on Price and entry points.

What is GE worth?

Today, the stock is worth $ 13.32 a share as I write this article. Yesterday, it was worth $ 13.23 to $ 12.70. I think the sell-off is way overdone, but the fear factor is real, and the margin calls are real.

My downside price target of $ 12.80 was hit yesterday. To me, it is worth $ 12.70. I bought it yesterday from $ 12.71 to $ 12.92. I may sell the rally, trading around my position and trying to get out with my scalp. I think the stock is worth around $ 15 to $ 18 a share by June 2019.

Bottom line is this: GE is a global digital business. The stock price will vary from day to day. Sometimes, it will trade at a significant discount to the business and its underlying fundamentals.

In my view, $ 12.70 represents a value that will cause the bulls to step in and stage a rally that could last into earnings.

Here is a look at a 10-year monthly chart.

In looking at the monthly chart above, one can see the sell-off in 2008 and 2009 and the 10 years that follow. Very few traders in the markets thought the stock could go down and break $ 13, but I did.

I wrote an article back in January stating more capitulation to come. In that piece, I wrote that GE could break $ 13 after hearing about the $ 22B GE Capital bombshell. I set a buy target of $ 12.80 back then and decided to stick with my unemotional thesis based on behavioral finance.

Important Note: GE only traded under $ 13 for a few short months in 2009 when the financial world was burning down and fear was everywhere. It is a very different world now, and in my view, GE is going to be fine.

Is GE a buy three months later at $ 13?

Maybe, if there is evidence of a solid sustainable turnaround and the clouds of uncertainty are raised. Right now, uncertainty is everywhere. There are far better stocks to buy that are going up, stocks with great earnings growth.

Mario Gabelli was buying GE in January at $ 16.

Two months ago, Kevin O’Leary said he would buy it at $ 13.

Now, Mr. wonderful just said on CNBC that he wants to buy the stock at $ 7 to $ 8. I get it. I have done the same thing many times. However, the market makes all of us look a little silly at times, and while GE may hit $ 8 a share, in my view, it is highly unlikely.

It is normal behavior to watch a stock get way oversold on highly negative sentiment and not be able to pull the trigger; only to watch it go on a quick 15% to 20% sharp rally with you on the sidelines.

This type of arrogant attitude is bullish to me as it may embolden shorts which could help the stock rally near term. He says “it can go to $ 8 easily.” I disagree. That was the height of hysteria, and the reason it went to $ 5.65 was a fake news story about BK, which was false. I bought it that day and owned it on March 9th when the market bottomed with a cost basis of $ 8.28.

It might be better to put your money into financials like Bank of America (BAC) under $ 28 or Citigroup (NYSE:C) on weakness. They are both growing earnings and raising dividends. Rising interest rates will do wonders for their bottom lines. Apple (AAPL) is a cash-generating monster with a continuing revenue stream and great margins.

The market is ignoring any positive news coming from GE at the moment

The new $ 1.3T government spending bill will likely be a huge positive for GE going forward. It stands to make some great profits on all different types of defense spending, which is totaling $ 700B. That is extremely bullish for GE and its future, but when a stock is in capitulation, many investors cannot ignore the noise.

Look at this slide from a JPM presentation showing what it makes for defense spending. The market is missing the boat with GE and its prospects for the future, in my opinion.

Bear case

GE Capital is going to be a drag on earnings for years to come. The $ 22B hit that the company took on the last conference call scared the hell out of most investors, including me.

Margins are getting squeezed with profits down 88% in the power division.

GE pension problems are out of control. (I disagree).

The Alstom acquisition is a disaster, and it will never be able to make the business model work.

SEC headlines in regard to GE Capital will remain a risk to the stock.

Bull case

Extreme pessimism around the stock is a contrarian play. GE has intrinsic value, but the market is not giving any value to GE as a company. Enterprise value is how much? Zero? I am not an expert, but as a long-term trader, I would give the company a minimum value of $ 5 for enterprise value, and in my view, that is conservative.

Aviation earnings should do great as worldwide jet engine growth spending ramps up over time.

Earnings report on April 20th should be terrible

I am expecting an earnings miss and more write-downs on the next call. I expect nothing good to come out of energy this fiscal year. This may be the worst quarter of the year for GE. Any positive news and clarity around GE Capital could pop the stock 10% overnight. A major earnings miss and investors could see a sell-off that takes the stock to new lows.

Conclusion

GE is in the dog house, although today is the biggest rally day in many years. The stock has hit a capitulation level that I believe could launch an interim rally as bulls force short covering going into earnings.

The company’s share count is over 2 Billion shares lower than 2009. The global economy is buzzing along with synchronized growth. While GE has problems, the company is slowly working through its issues.

I am not bullish on the name but believe that an interim rally point may have been reached at the $ 12.70 level. Today’s trading activity is a good sign for beaten-down shareholders suffering under years of bad management.

April 20th is the next report card for GE. Investors will be looking for clarity on GE Cap. and free cash flow growth. I see GE going nowhere fast as this year will be a reset. While I am long the stock, I will be looking to exit and hedge on rallies.

An announcement of a big-time investor like Warren Buffett could pop the stock 5% to 10% in a heartbeat. Investors will be watching closely to see who the new whale is jumping into GE.

Short squeezes are the start of many individual stock rallies, and they can happen very quickly and keep going, wringing out shorts. From there, improving fundamentals can take a stock higher.

As always, I encourage investors to do their own due diligence and make their own decisions and always have an exit strategy in place before making any trades.

Disclosure: I am/we are long GE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Tech

Related Posts:

Pin It

Posted in: Cloud Computing|Tags: , , , , , ,