General Electric Company (NYSE:GE) stock is one of the least popular large-cap issues in the entire market right now. Investors are bailing: GE stock has declined 22% year-to-date, making it the worst performer in the Dow Jones index.
Analysts have turned sharply negative as well. Just in the last month, Deutsche Bank AG (USA) (NYSE:DB), JPMorgan Chase & Co. (NYSE:JPM), and Morgan Stanley (NYSE:MS) all have issued ‘Sell’ ratings on GE shares. One ‘sell’ rating for a company like General Electric is unusual. Three in a month is exceedingly rare.
There’s good reason for the bearishness and little reason to see it abating just yet. I had argued last month that GE stock might be worth a shot, and indeed GE has risen about 4% since then. But in the weeks since then, the sentiment toward General Electric clearly has worsened. And from a short- and long-term standpoint, it’s become just too tough to recommend the stock even near its lowest levels in almost two years.
Short-Term Concerns For General Electric
The short-term concern for GE stock is that sentiment is bad – and getting worse. Investors are selling. Analysts are downgrading GE stock and pulling down price targets.
That obviously leads to a potential contrarian case to buy the stock – but at this point, I’m no longer sure we’re close to a bottom. It’s not as if GE shares are exceedingly cheap, trading at about 16x 2017 EPS estimates. That multiple can go lower.
Meanwhile, Q3 earnings will arrive next month and there’s little reason to see either improvement or a bout of good news. Morgan Stanley has predicted a so-called ‘kitchen sink’ quarter. In other words, General Electric may very well try to stuff as much bad news (such as impairments and lowered earnings guidance) into the quarter as possible, giving new CEO John Flannery a clean slate going forward.
At the least, General Electric is too large to see its earnings trajectory change markedly in the six weeks since former CEO Jeff Immelt stepped down. The odds of good news coming out of Q3 seem slim. Rather, investors need to wait until November, when Flannery’s new plans for the company will be released after a long review. Even that might not be enough to turn the tide on GE stock.
Long-Term Concerns For GE Stock
From a long-term standpoint, there’s simply a real question of what General Electric has to offer investors and how it’s supposed to grow. For some time now, earnings growth has been predicated on cost cuts. As InvestorPlace columnist Will Ashworth pointed out earlier this month, cutting costs is easy work and can’t last forever. And while selling the corporate jet fleet might make headlines, it’s not near enough to change the earnings profile of a company with ~$120 billion in annual sales.
It seems lately that all General Electric is doing is shrinking, not growing. The workforce is being cut. Business units are being sold, including the rumored sale of the industrial solutions unit to ABB Ltd (ADR) (NYSE:ABB). While rival Honeywell International Inc. (NYSE:HON) drives steady growth, and sees HON stock climb as result, GE looks stagnant and stalled out.
At some point, General Electric needs to show at least some promise that it can drive growth on its own. That point isn’t here, and it’s not clear that it will ever arrive again.
Easier Ways To Make Money
At the end of the day, GE stock at $25 likely isn’t the worst buy in the world. A 16x EPS multiple isn’t hugely attractive, but it’s not terribly onerous, either. I argued last month that a 4% dividend yield could provide a near-term floor for the stock and that indeed turned out to be the case. I’d expect it to be the case again going forward unless GE cuts the dividend, a reasonably significant risk given its disappointing cash flow numbers.
But investors buying GE stock still are doing so in part because the stock looks cheaper than it was. And that’s a terrible reason to buy a stock. The fact is that investing isn’t just about the numbers, it’s about the company and its operations, too.
It’s increasingly difficult to look at General Electric and see anything but a company adrift, and one without a clear path to returning to relevance. And until that changes, there will always be smarter, safer, plays than GE stock.
As of this writing, Vince Martin has no positions in any securities mentioned.