In mid-December, I made a point of saying General Electric Company (NYSE:GE) was a buy, not because the company was facing an unexpectedly bright future, but because the beat-down of GE stock had become excessive.
If nothing else, relatively new CEO John Flannery was making some tough-but-good decisions that would put the iconic company back on a bullish track that few were expecting it to find anytime soon.
Since then, the company disclosed that its insurance division of its remaining financial arm will be booking a $6.2 billion charge stemming from what was, ultimately, a mathematical mistake. In the meantime, the SEC has decided that matter is worth a closer look. General Electric stock is down about 9% since my call in December, with the prospect of being removed from the Dow Jones Industrial Average weighing on shares.
Nevertheless, I’m sticking with my original thesis. If you can stomach the risk and deal with the inevitable volatility, this is a name worthy of a little bit of your speculative money.
The Game Is Afoot
I said it before, but it merits repeating now: if you’re looking for a strong fundamental argument to support my bullish case on GE stock, don’t hold your breath. Sales are barely going to grow this fiscal year or next and earnings are stagnant as well. The company’s got problems galore.
That superficial picture didn’t improve with its recently reported fourth quarter numbers either. Stifel Nicolaus analyst Robert McCarthy called them “messy, underwhelming” results and nobody argued his assessment.
Problem is, for better or worse, that’s not how the modern market works.
Reality check: Stocks don’t trade based on trailing fundamentals. They don’t even always trade on forward-looking forecasts. Mostly, they trade based on what investors expect other investors to feel about a stock at X date in the future.
It certainly makes things interesting and, often, tough. If you know those are the unspoken rules of the game, though (and right now, for GE stock, they are), then you know the worst-case scenario is already priced in. You won’t get the bullish green light from actual results until well after the fact.
I take some comfort in knowing that Gamco Investors’ Mario Gabelli sees the same outcome that I do on the horizon. He recently added $40 million worth of GE stock to an existing position, suggesting shares could be trading in the $20’s again within a couple of years. Truth be told, though, that’s not the only — or prevailing — reason I’m optimistic, despite the backdrop of pessimism. I’m also bullish because (in all seriousness) the market absolutely hates GE stock here.
The specifics: On a scale of 1 to 5 (where 5 is a “sell” and 1 is a “strong buy”), General Electric holds an average rating of 2.7, which is just a tad better than a “hold”. Knowing the implicit bullish bias analysts tend to harbor, however, that’s the professionals’ unspoken equivalent to a “steer clear” recommendation. It’s compelling, because effectively, there’s not a lot more room for downgrade-driven downside.
The other interesting aspect of analysts’ opinions of GE: Despite the doubts expressed in their ratings, the analyst community still holds a price target of $19.86 per share on GE stock, right around where Gabelli sees it going in the foreseeable future.
It may be tough for analysts to buck the prevailing opinion when it comes to ratings. If they wanted to make a bullish call without making too many waves though, higher price targets that didn’t entirely jibe with their official ratings would be the place to do it.
Bottom Line on GE Stock
Yes, there’s a decent chance that General Electric could be booted out of the Dow Jones Index, forcing an army of fund managers and ETFs that offer index-based products to flood the market with GE stock, which clearly wouldn’t help its price.
That might not happen, though, if the highly-diversified company can show any signs of life in the near future. Even if it does happen, however, somehow I’ve got the feeling that such a scenario is already factored in. Shares are down nearly 50% since their December-2016 peak. Some of that was deserved — some wasn’t.
It’s still not a trade you can afford to take your eyes off of — even for a minute. You’ll also want to keep a short leash on it, particularly if the broad market tide gets a little hairy. It’s a bet with a 20% upside, though, and maybe more for patient investors that understand the psychological game that’s being played here.
Weak hands are being forced out, and convicted bulls are being tested.
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.