Don’t quarantine your wealth. Do this instead…

On April 1, InvestorPlace analyst Matt McCall is revealing details about a little-known corner of the markets that could hand you a fortune during a bear market. To prove it, he’ll share the name of his #1 bear market stock.

Wed, April 1 at 7:00PM ET

General Electric Company (GE) Stock Is a Dog of the Dow

Why GE stock could bounce back

General Electric Company (NYSE:GE) stock’s performance since 2000 contrasts sharply with its performance from 1981 to 2000.

From 1981 to 2000, under legendary CEO Jack Welch, GE’s stock exploded. It began January 1981 at $1.29 a share, and almost touched $60 a share in October 2000. This represents a monstrous 4,600% gain.

Impressive, you might say, but wasn’t this achieved during an unprecedented bull run? Yes, the rest of the market also did well, but GE still outperformed them by a long shot. The Dow Jones Industrial Average rose 952.2%, and the S&P 500 929.5%.

GE beat them by a factor of almost five. But look at its performance since then.

The stock fell 56%, while the market as a whole posted some gains: 68.3% for the S&P 500 and 101.4% for the Dow.

And that’s before you factor in inflation.

GE has been a Dog of the Dow since 2001.

GE hasn’t done much better in the short term, either. The stock is down 20.5% year-to-date, making it the worst-performing stock on the Dow Jones for 2017.

On July 21, the company released its second-quarter earnings, beating on revenue and earnings, but with sales down 12% from the same period last year.

This also was Jeffrey Immelt’s last earnings call as CEO. GE’s current boss, John Flannery, took charge on Aug. 1.

In early July, when GE stock was trading at $27 a share, a J.P. Morgan analyst predicted that the stock would fall to $22 because of all uncertainty over its future.

In March, I raised concerns over the company’s valuation. On several measures, GE stock traded at higher valuations than in December 2007, just months after the Dow peaked at over 14,000.

Since then, GE stock has lost about a seventh of its value, and is trading near 52-week lows.

Will GE Stock Bounce Back?

I often discuss valuations, which I consider arguably the most important thing in investing, and whether or not companies can meet the expectations these valuations set.

High valuations mean high expectations, and low valuations mean low expectations.

High valuations often prove difficult for a company to fulfill, leading investors to punish the stock. And low expectations on unloved stocks often prove easy for the company to exceed, pushing the price up.

It’s difficult to stay at the top or at the bottom of the market for very long. Good companies eventually have a bad earnings call and bad companies tend to bounce back.

This is known as mean reversion, and David Alton Clark suggests that GE could be a mean reversion play.

Buying the worst-performing dividend stocks in the Dow, the dogs, is an old investment strategy. GE is clearly one of the dogs, both on a short-term and long-term basis.

Nothing lasts forever, and eventually the bearish sentiment around GE will subside.

Could This Shift Sentiment in General Electric?

GE isn’t exactly low-tech: aircraft engines, locomotives and MRI machines are all extremely complicated and require thousands of parts.

General Electric was founded in 1892 and many still associate it with the “old economy”, which doesn’t interest investors that much.

Mentioning a stock like Netflix, Inc. (NASDAQ:NFLX) or Tesla Inc (NASDAQ:TSLA), on the other hand, could really pique an investor’s interest.

Can General Electric move in this direction?

InvestorPlace contributor James Brumley wrote an article in May outlining how General Electric is becoming a technology company. GE wants to use advances in technology, including software, cloud computing, 3D printing and the Internet of Things, to improve manufacturing processes.

These technologies will reduce costs and improve quality with GE’s existing manufacturing operations.

Also, General Electric can sell this platform, known as Predix, to other manufacturers: James Brumley noted that the business is generating billions in revenue.

And this is high-margin revenue: a 2016 article put the EBIT margin for GE’s software segment at 35%. Data analytics managed a 50% EBIT margin. One-fourth of the company’s earnings could come from GE Digital by 2020.

GE also is becoming a major player in 3D printing. Last year, it purchased two 3D printing firms, and expects $1 billion in 3D printing revenue by 2020.

As more investors realize that GE is becoming a tech company, their appetite for the stock will likely increase as well. This might be an extreme example, but look at happened to the stock price of Norris Communications when it changed its name to e.Digital Corporation (OTCMKTS:EDIG) in 1999.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities

Article printed from InvestorPlace Media,

©2020 InvestorPlace Media, LLC