Iconic industrial giant General Electric Company (NYSE:GE) provides a perfectly unfortunate case study for learning when to quit. This tough lesson is particularly relevant in the markets as things can go from bad to worse in a heartbeat.
GE stock, a supposed turnaround candidate after a leadership shakeup, is now spiraling out of control.
It’s certainly not for a lack of trying. I previously argued General Electric is trying too hard. Just take a cursory glance at the company’s website. Through historical traditions, most Americans associate the GE brand with appliances. Today, the corporate behemoth has its hands in everything, from avionics to healthcare. Diversity is awesome, but, in the markets, it can work against you.
As it stands, GE stock is the ultimate hedge. If the transportation sector goes down, the medical technology sector could help pick up the slack. That’s great if you had the opportunity to pick and choose. However, General Electric is a hulking beast in an era where agility and decentralization is key.
I’m not necessarily suggesting that operating multiple businesses is bad. Apple Inc (NASDAQ:AAPL) involves itself in all kinds of businesses. To a lesser extent, Sony Corp (ADR) (NYSE:SNE) does the same with its consumer electronics, entertainment division, and life insurance programs. The difference, of course, is that these companies juggle diverse sectors successfully.
Apple shares are up 37% year-to-date, while Sony gained more than 42% over the same time frame. In sharp contrast, GE stock shed nearly 25%. The worst part about the whole mess with General Electric is that no evidence suggests the pain is subsiding.
If you’re holding onto GE shares despite the warnings, you should brace yourself for a rough ride.
GE stock remains Unconvincing despite Best Efforts
As I mentioned at the top, knowing when to quit is just as important as deciding when to buy. I previously thought that General Electric had the right stuff to stage a comeback, but when the markets failed to respond with even pedestrian stability, I questioned exposure to GE stock.
Since abandoning GE, shares are down 9.5%. After doubling down on my bearishness at the end of July, the industrial titan is still off the pace by 7%. It’s not just a matter of a company performing poorly — such events occur all the time. Rather, we’re witnessing the acceleration of bad fundamentals. Contrarians should take note.
On Alphabet Inc‘s (NASDAQ:GOOGL) financial hub, bullish arguments favoring GE stock have circulated rapidly. The basic premise is that General Electric shares are nearing a bottom, representing a long-term entry point. But when arguments mention the YTD loss as the top bullet point for why a company is on the rebound, I think you have to be cautious.
Granted, several sectors in the U.S. economy improved. For GE stock, one of the most important metrics is industrial production. Since President Trump took office, manufacturing witnessed a bump up. However, the improvement is modest, and overall manufacturing levels are below pre-Great Recession peaks. Although the broader economy is pointed in the right direction.
Critically, though, Wall Street maintains a dim view on General Electric. This is especially significant, because GE hasn’t missed an earnings forecast since two-and-half-years ago (for first quarter 2015). Since that last miss, shares are down 6%. For nearly three years, GE has done nothing other than to provide a consolation prize in the form of dividends.
For General Electric, the Worst is Yet to Come
Unfortunately, a losing stock is a losing stock. Sure, General Electric’s dividend yield is generous compared to several other companies. But losing double-digits on your capital investment to gain single-digit passive income isn’t a great strategy. The exception is if that investment was going to turn itself around. I’m just not sure if that’s going to happen.Given the ugly sentiment surrounding the company, the analysis firm sees approximately an 18% correction from here. Thus, if you’re hell-bent on picking up General Electric on a “discount,” then waiting may be the better decision.
Again, I reiterate caution. When shares go into free fall, it’s anyone’s guess where the actual bottom is. Sharply declining stocks can trigger multiple stop-loss orders. These orders are typically located at psychologically important levels. Breaching them, as Johnson Research Group identified, could cause more pain than GE stock is worth.
Josh Enomoto is long SNE.