If you’re investing in General Electric Company (NYSE:GE) for the dividend, you may want to rethink your strategy. On and off the GE stock chart, it’s the bears who look ready to increase their return on investment with a long put strategy.
Investors love their dividends, but an increasingly out-of-favor General Electric with its above-market payout of 3.1% demonstrates the shortfall of focusing too much on generating income alone.
In 2016 a quarterly return of profits to GE stockholders has so far paid out 2.3% and there’s still another payment in the wings. The bad news is General Electric’s adjusted total return is underwater by over 3%.
Adding salt to the wound, benchmarks like the Dow Jones or S&P 500 are up by roughly 4% to 5% respectively and without including dividends in excess of 2% apiece. But who’s counting, right?
Wrong!
Maybe making matters worse, GE started 2016 off well enough or at least had good company as the stock traded more or less in line with the DJ-30 and S&P 500 into July. So, what went wrong?
Off the price chart things began to go awry for GE stock with last quarter’s earnings report, which disappointed investors with a surprise 2% decline in orders and 1% slip in organic sales.
The weak data trumped a dazzling bottom-line beat and turnaround from the year-ago period and it has been all downhill for General Electric shareholders ever since.
Secondly, investors could be latching onto potential investment risks tied to GE’s restructuring.
JP Morgan’s Stephan Tusa and his team have been long-time bears that maintain this view. It also appears the firm isn’t looking for any investment banking business as they hold an underweight rating and bearish $26 price target on GE stock.
Finally and on the GE stock chart, the technical information suggests Mr. Tusa’s target might not be such a stretch. Let me explain.
GE Stock Daily Chart
Exactly one year ago GE stock jumped aggressively higher and formed a bullish price gap. Investors applauded news of activist investor Nelson Peltz accumulating a $2.5 billion position in General Electric on the basis of a significant return of shareholder value as the company re-embraced its industrial roots.
A year later and the General Electric price chart is implying investors have been busy rethinking some of their prior enthusiasm. Relative weakness earlier this quarter led GE stock to break below the uptrend support which formed following the Nelson Peltz report.
Currently, the past three to four weeks in GE have worked to form a bearish flag against the former support line. The pattern’s dampening of volatility should act as a platform for yet another leg lower in General Electric.
The question now might be, “do all gaps get filled?” The answer is no, but the one we’ve detailed from last year doesn’t look entirely out of the question.
Of course, were GE stock to make good on that promise, JP Morgan’s clients would stand to make some bank as the price action would fill the firm’s $26 price target.
GE Stock Long Put Strategy
For traders who agree another leg in GE’s correction is about to unfold, a long Nov $29 put is attractive for positioning.
Priced for 46 cents with GE stock at $29.50, this long put is fairly cheap in dollar terms and has the benefit of being affordable in the context of historic and implied pricing.
The November put also doesn’t require too much from GE stock in order to double in price. On an expiration basis, a double can be had if GE merely drops by 5% over the next several weeks.
Given an earnings release in October and last quarter’s bearish reception, a historically wobbly trading month and even a dividend that can help boost the put’s own bottom-line; this looks like a decent way for bears to increase their own return on profitability.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
