Thanks to rising oil and gas prices, a bottom seems to be in on General Electric Company (NYSE:GE), making General Electric stock a decent bet for patient, conservative investors.
Domestic oil prices have surged past $63 per barrel, and natural gas prices are off their lows, sending the value of GE’s stake in Baker Hughes A GE Co (NYSE:BHGE) up about 10% in a week, and putting a floor under the General Electric stock price.
Analysts disagree over whether the latest bounce is real or a value trap. But it’s hard to see how much worse things can get, given that management knows what its problems are and how it should go about fixing them. The dividend has been slashed in half, but even at its new level, GE stock is yielding 2.6%, better than you’re getting on a 10-year U.S. government bond.
GE Became an Oil Stock
As I wrote last November, former CEO Jeff Immelt was selling GE as a tech company while he was really building a fossil fuels company. New CEO John Flannery, who formerly ran the profitable GE Health unit, has recognized the problem and admitted it will take time to fix.
Immelt had sold things like finance and entertainment near their lows and bought power units like Alstom of France near their highs. Flannery can’t start cutting back the French jobs until next year, thanks to promises Immelt made in buying the unit, but those cuts will come, and the savings will flow to the bottom line.
Assuming the recent oil price run-up is sustained, GE will also have an opportunity to reduce its stake in Baker Hughes and put that money to work in areas like GE Health, GE Power, GE Renewable Energy and GE Aviation, which remain profitable. Adding in debt, GE currently has an enterprise value of $280 billion, but the profitable units should be worth more than that.
The Question of When
If GE can hit its consensus estimate of 29 cents per share of earnings for the fourth quarter, due to be reported Jan. 24, and if Flannery can tell investors there are no more nasty surprises to come, General Electric stock should surge in a market where many stocks are overpriced.
Analysts haven’t just downgraded the stock. They have begun to ignore it. Only 18 now follow it, seemingly with half an eye, with only seven suggesting a buy and three saying sell it. That tells me expectations are washed out.
Who Should Buy General Electric Stock
GE is no longer a stock for everyone.
If you’re looking for fast capital gains, avoid it. If you’re looking for wild price swings in either direction, stay away.
GE is only attractive for investors who want to protect their capital and are willing to stay in for several years to be proven right. There are still going to be nasty headlines, when oil prices decline, when French workers complain, and when the general market takes a hit.
You must be willing to ride all that out, looking toward 2021 for the workforce to be cut, the oil business to be sold, and Flannery’s new strategy to play out. There isn’t much appetite for that kind of patience in today’s go-go market.
But some people are starting to nibble on General Electric stock, and the bears can’t make things much worse. If you’re ever going to take a flyer on it, now would be the time.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.