by Jim Woods | March 18, 2011 5:00 am
It sells everything from aircraft engines to consumer appliances to railroad locomotives and medical equipment, but over the past week the world has been focused on General Electric’s (NYSE: GE) nuclear reactors. As the crisis situation at Japan’s Fukushima power plant escalates, General Electric has found itself at the fulcrum of the crisis. That’s because GE, along with Japanese conglomerate Hitachi Ltd. (NYSE: HIT), designed all six of the reactors at the troubled plant four decades ago.
Not surprisingly, GE stock has been pummeled in recent trade. As of March 17, the stock was down nearly 9% from its recent high. The weakness in the Dow component has helped bring stocks down so far that, as of this writing, all of the market’s 2011 gains have been wiped away.
So, what’s next for GE stock? Will the current bout of selling be only a blip on the long-term radar, ultimately resulting in a great buying opportunity in the stock at current levels? Or, does the current sell-off represent the beginning of a protracted decline in the once-mighty conglomerate’s shares?
Here are three pros, and three cons of GE stock:
Diversification mitigates nuclear damage. GE is a huge and extremely diversified company. That means the loss of any future revenue (or potential financial liability from the Fukushima crisis) will likely be minimal. In fact, GE’s nuclear unit accounted for about $1 billion, which doesn’t seem trivial until you realize that the company posted total revenue in 2010 that was north of $150 billion.
Diesel and gas turbine boost. GE is a major supplier of diesel and gas turbines, and that could be precisely what’s needed to help a power-stricken Japan recover from the devastation of the earthquake/tsunami/nuclear meltdown. GE actually has the biggest market share globally in the gas turbine business, and an increase in this source of power could very well offset any losses from its nuclear division.
Buy the sell-off. Technically speaking, GE shares now have plunged well below their short-term, 50-day moving average. The stock now trades around $19.30 (as of March 17), and that makes it an attractive “buy the dip” candidate for traders looking to get a bargain on the shares.
The nuclear sell-off. The selling we’ve witnessed in GE shares over the past week has indeed been troubling. It’s scared off many holders of the stock, and for good reason. The crisis could really be a scarlet letter on the sleeve of the company for years to come, and that could continue driving down the value of GE stock. As Susan J. Aluise put it in a recent article, “This could be GE’s Deepwater Horizon,” referring, of course, to the big decline in stocks such as BP plc (NYSE: BP), Transocean (NYSE: RIG) and Halliburton (NYSE: HAL) in the wake of the Gulf oil spill.
Global sell-off fears. If the events in Japan, along with the almost-forgotten conflicts still raging in the Middle East, combine to push the market down further, then you can bet that widely held GE shares are going to spearhead the plunge. The stock is often considered a proxy for the health of the market, and as such, it is susceptible to distaste for stocks by the investing public. In other words, if sellers continue to dominate, GE will continue to struggle.
Technical support is at the 200-day. So far, we’ve seen GE shares tumble below their short-term, 50-day moving average. The next sector of support for the stock is at the long-term, 200-day moving average, which is currently at $16.86. If the stock were to fall to this level, it would mean another 12.7% decline in the shares. That’s not an attractive proposition for traders or investors.
There’s no doubt that the nuclear crisis in Japan has the potential to keep GE stock down for the short term. However, the nuclear division is only a small part of the company’s business. Certainly, the situation in Japan has rightfully captured center stage, but if you are bullish on the global economic recovery — and I am — then it’s a good bet that GE’s diversified businesses will continue performing well. Despite the current headwinds, I think the verdict here is in favor of the pros.
As of this writing, Jim Woods did not own a position in any of the stocks or funds named here.
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