3 Reasons General Electric Company (GE) Stock Should Be Ignored

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Back in the 1980s and 1990s, General Electric Company (NYSE:GE) was a symbol of growth, led by the iconic CEO Jack Welch. Yet since he has departed, the fortunes of GE stock have soured. While there have been many moments of potential breakouts, they have never been enough.

3 Reasons General Electric Company (GE) Stock Should Be Ignored

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For the year so far, GE stock has continued to disappoint, with a loss of 8%. This is the case even though other industrial conglomerates — like Honeywell International Inc. (NYSE:HON) — have been able to post solid gains.

So, what’s going on here? There are serious fundamental issues with General Electric, which will probably require bold change — and yes, that includes the departure of the current CEO, Jeff Immelt. With that in mind, let’s take a look at some of the challenges that the company faces right now:

GE Stock Issue No.1: Earnings Quality

There’s an old saying on Wall Street: Earnings can be faked, but cash flow never lies.

It is important to keep in mind that earnings can certainly be managed, such as with one-time charges and loose interpretations of accounting standards, but when it comes to cash flows, there is not as much leeway.

So when a company is reporting strong earnings but the cash flows are weak, then there should be some alarm. Is there some chicanery going on?

Interestingly enough, in the case of GE stock, there is often a disconnect between earnings and cash flows. For example, in the latest quarter the company reported net income of $653 million, yet the cash flows were negative $1.6 billion.

Then again, GE has engaged in the typical efforts to pump-up the profits, such as with aggressive buybacks and favorable accounting policies, such as in regard to receivables. However, it should be concerning that it appears that there is a general lack of quality of earnings, which is likely covering up fundamental issues with the company.

GE Stock Issue No.2:  Leadership

In corporate America, there is often too much emphasis on the short-term. Yet in the case with Immelt, it seems that he has had more than enough time.

And unfortunately, his overall performance has been fairly lackluster. When he took the helm in September 2001, GE stock was at nearly $40 a share. But as of now, it is at $29.

In light of this, it is really a head-scratcher that Immelt still has his job!

Perhaps this is why General Electric has attracted the attention of activist investors, like Trian Partners (the firm has been an investor since 2015). Interestingly enough, it appears that the company is already missing the key performance objectives, such as on growth and cost cutting.

GE Stock Issue No.3:  Too Complex to Succeed

It’s not easy gauging the financials of General Electric. The fact is that the company is a sprawling global organization, with businesses in far-flung categories like energy, renewables, additives, lighting, aviation, power systems, healthcare, transportation and even the Internet of Things.

Granted, GE has spun-off various business over the years. Yet even these moves have proved mixed.  After all, the company divested Synchrony Financial (NYSE:SYF), which has gone on to grow at a nice pace and rack-up gains of over 44%. Of course, the financial sector has been one of the hottest areas on Wall Street, as seen with operators like Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM).

Oh, and then there was Immelt’s aggressive move into the oil and gas business, which came right before oil price plunged.

So perhaps the best thing to do would be to focus on just a couple main categories that offer secular growth opportunities, and stick with them. Otherwise, General Electric may just wind up being an organization that is too complex to thrive.

Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/general-electric-company-ge-stock-ignored/.

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