On the surface, shares of General Electric Company (NYSE:GE) “should” not be a buy. The GE stock chart is still in decline and valuations are really nothing special. And for a little more salt in the wound, former CEO Jeffrey Immelt, announced Monday that he will step down from his role as a director and Chairman of its board, effective immediately.
It is enough to make investors want to shun the stock, never to return. And that is exactly the time to get more interesting in buying it.
GE certainly has its fingers in a lot of pies as a giant global conglomerate. Aviation, household appliances, industrial finance, renewable energy, healthcare and a whole lot more give investors many reasons to at least give it a look.
The question is why is the GE stock price down 22% year-to-date while the S&P 500 Index is up 13%? Clearly, something was wrong. But is it still wrong or did they finally get their act together?
Indeed, over past few years, the company has shed a good deal of its non-core businesses, including greatly downsizing GE Capital. That’s good although it does take time to replace the revenues of its former divisions.
It is also good that the dividend yield is now at a very attractive 3.9%. Considering that the dividend was a huge negative issue when it was slashed in 2008, investors rightly worry that it can happen again. After all, its new investment plan is eating a lot of cash and the company has a high dividend payout ratio at 83%.
Over the years, investors relied on dividends and management has made a commitment to them. Also, the company has paid down $174 billion in debt over the past four years and dividends themselves grew an average 6% per year over the previous five years.
GE Stock’s Technical Reversal
It is no secret that GE stock was totally disconnected with the stock market’s bull run over the past 10 months. Indeed, after the initial Trump rally move higher, the stock stalled in December and it was all downhill from there.
Any chart analyst will tell you that you do not try to catch a falling knife in the hope that the stock is finally cheap. Cheap can – and usually does – get even cheaper.
But what they might say now is that the market finally offers some real signs that a bottom is near, if not already here.
Click to Enlarge For starters, the lowest point of the decline seen last month was right at long-term support from the bottom of the 2013-2015 trading range.
Investors found this level – $23.50, plus or minus a few nickels – to be attractive in the past even as the company worked through the many missteps of previous management.
Next, in the short-term term, we see the beginnings of a bullish setup. The jargon term is an “inverted head-and-shoulders” pattern and it signifies a slow change in mood from bearish to bullish. Investors finally started to nibble on shares and even became slightly more aggressive about it.
We know this from the “tea leaves” on the chart. The most recent price dip set a higher low, meaning bulls bought that dip earlier than they might have done during the rest of the 2017 decline. That is an uptick in demand.
There are plenty of other technical indicators suggesting a change in momentum and a shift in money flows. However, they only serve to support price action, which itself looks as if it is changing for the better.
Buy GE Stock for the Long-Term
Hardcore chart technicians want to see proof that the trend indeed changed to bullish, most likely with a move above $25.20. That is where the top of the current pattern is right now. If you are so inclined, it is the neckline of the head-and-shoulders pattern.
However, GE has been around for a long time and is the only member of the original Dow Jones Industrial Average that still exists as a company. Longevity is a good thing. If we take a long-term investment view, there is a very good chance that in a year from now buyers of this stock, even if a little early, will likely be quite happy.
As of this writing, Neil Martin did not hold a position in any of the aforementioned securities.