General Electric (NYSE:GE) is one of the world’s largest conglomerates, producing everything from jet engines to light bulbs, from medical imaging equipment to kitchen appliances. The company may be the most diversified company in the world. You would think the diversification would help the company during slow economic periods, but the stock hasn’t been able to get much traction over the last few years. In fact, the stock has traded in a range between $13.75 and $21.65 for the last two years and eight months.
GE is set to release earnings tomorrow morning and you might think this would give the stock a chance of breaking out above that upper rail of the range, but I wouldn’t count on it. The last time GE announced earnings back in January, the stock traded in an 80-cent range for a month and half after the announcement. Under normal circumstances, trading in a tight range wouldn’t necessarily bother me, but this came as the overall market was rallying rather sharply.
The company beat earnings estimates by a penny back in January and they beat on the revenue estimate as well. In fact, GE has beaten or met earnings estimates in each of their last four earnings announcements, but the stock is down slightly for the past year; over the past five years, the stock is down more than 35%. Since legendary CEO Jack Welch retired in April 2001, the stock is down 40%. (Sorry Mr. Immelt, I couldn’t resist).
Part of the reason for GE’s underperformance could be the sentiment toward the stock. It seems that the company is always a favorite of value investors and is always considered a buy. The current analyst ratings show 14 “buy” ratings and three “hold” ratings. When you see this many buy ratings without enough sell or hold ratings, it leaves little room for upgrades. Look at it this way … if everyone that wants to own the stock already owns the stock, who is left to buy?
Analysts aren’t the only ones that are bullish on GE either. Short sellers have shied away from GE as the short interest ratio is a meager 1.4. Option traders have shown a bullish skew as well with the open interest put/call ratio sitting at 0.68 (one of the lowest readings in the past year).
Looking at the open interest of the options and the location of peak open interest, there are 117,000 April 20 calls open at this time and another 115,000 open at the 21 strike. In my experience, with an extreme open interest level like this, the stock has no chance of gapping significantly higher after earnings are released tomorrow.
Given the extreme bullish sentiment toward GE and the huge open interest on the April 20-strike calls, the safe bet for tomorrow is for a downside reaction or very little reaction. I definitely wouldn’t be betting on any upside.
As of this writing, Rick Pendergraft does not own any shares mentioned here.