Early this month (and not for the first time), I suggested General Electric Company (NYSE:GE) was a buy, in spite of the spate of bad news that’s dogged General Electric stock for the past several months. In short, I surmised that things couldn’t get any worse for the GE, and all the bad news had been priced in.
Since then, things got worse for the company, and General Electric stock has fallen more than 10%. Namely, the company informed the market it’s going to be restating its fiscal results for the past two years to reflect new, self-imposed accounting standards. And, whispers are starting to surface that recently retired CEO Jeff Immelt fostered an environment where problems were covered up rather than addressed. Now those problems are coming back to haunt the organization.
It’s all enough to prompt a rethinking of any bullishness on GE stock.
All the same, even with the bad-news bombs that were dropped on investors just within the past few days, I’m sticking with my original thesis … that GE is at or near a bottom that makes it more of an opportunity than a liability.
The Latest News for General Electric Stock
However, much you think General Electric earned per-share in 2016, deduct 13 cents from it. For 2017, shave off 16 cents-per-share of General Electric stock. The impending restatements will better reflect the way the company reports earnings resulting from long-term contracts.
The move follows a recent revelation that the conglomerate’s long-term care insurance arm underestimated how expensive it would be to make good on those policies. The end result was a $6.2 billion charge.
The pair of financial gaffes certainly underscore something Deutsche Bank analyst John Inch opined just last week. He explains that the company has been “brushing things under the rug and leveraging aggressive accounting” for decades, adding “One could infer the prior management basically did this to drive the … adjusted EPS up as much as possible to pay themselves as much as possible.”
There may be some truth to the notion, even if the picture is fuzzy. There’s certainly enough credibility to the idea to push people away from the stock. In the meantime, the buzz is that the company wouldn’t be surprised if the Department of Justice probed the company’s sub-prime mortgage business.
And yet, there’s still something compelling about GE here.
Gut Check
I made this point a couple of different times since late last year, but it bears repeating again … this has become a story stock, and the fundamentals have little to do with the stock’s future. Rather, headlines are now behind the wheel of General Electric stock, and that changes every aspect of this game.
And as it stands right now, though the headlines continue to look grim, the rhetoric has set the stage for equally thrilling headlines of redemption and turnaround.
Like it or not, stocks don’t trade based on the market’s perception of where a company has been. They don’t even really trade at values reflective of where a company is likely going. Mostly, stocks move in step with how investors think other investors are going to feel about a particular stock at certain point — maybe six months — in the future.
To that end, despite the results-restatement and Deutsche Bank’s recently voiced concerns about buried time bombs, I still contend there’s not a whole lot of news left that could do any real damage to General Electric stock. Any sway future headlines may have going forward is bullish, or nothing — it’s all priced in.
Bottom Line for General Electric Stock
The stock admittedly isn’t easy to own here. Analysts are anything but thrilled with its apparent prospects, and investors can’t help but wonder if there are any other painful headlines just waiting to be printed.
There may well be.
Still, new CEO John Flannery is clearly willing to make some tough decisions, and isn’t afraid to air out the company’s dirty laundry. He’s even willing to entertain the idea of a corporate breakup, if that’s in shareholders’ best interest. The decision to shrink the number of company board members and add several turnaround veterans to that mix also speaks volumes. The change dynamic points to a real overhaul.
Yes, it could take years for the company to reach its full potential. That’s OK though. The market will reward milestones met along that path, in the form of a higher prices for General Electric stock. For investors, the direction of the journey is just as important as the destination.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
