It has been a long while since General Electric Company (NYSE:GE) has brought good things to life for its shareholders. But with shares well oversold by some metrics and maybe showing speculative value by other standards, a modified bullish fence on General Electric stock looks like a smart way to suit up as a contrarian among Wall Street’s sharks and whales. Let me explain.
Tuesday turned into a less-than-terrific session for investors heavily invested in the broader market. But as the Dow Jones Industrials turned tail and tanked to finish off by around 1.25%, General Electric stock enjoyed a rare session of beating back the market with a gain of 4.27%.
The defiant price action came amidst unsubstantiated rumors Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) may be interested in buying a stake in the very out-of-favor General Electric stock. And in this instance, those often fishy-sounding speculations may have a bit more Street credibility.
Aside from famously buying when others are selling in panic, the value-oriented investing whale did suggest back in January he would consider re-entering General Electric stock at the “right number.” Given shares were trading near $18.75, could today’s improved price discount in the $13.50 ballpark be worth stepping up to the plate for Berkshire Hathaway?
Maybe.
Along with a near-30% dip in GE’s share price the company has been implementing massive changes aimed to put the derailed industrial icon back on track. That’s the good news. The bad news are still very real issues ranging from significant debt, legal woes and the undesirable claim to fame of having the S&P 500’s largest pension shortfall. So, is there enough of a “disconnect between the fear and fundamentals” to entice a whale like Buffett?
General Electric Stock Monthly Chart
When I last wrote about General Electric stock, shares had sunk about 10% from when Buffett mused he’d be interested for the right price. The discount wasn’t significant enough for this strategist. Our advice was for bulls to steer clear and bearish traders to position with a long put spread. “K-A-A-C-H-I-N-N-G!!!!”
Technically, the continued weakness in GE does have us now looking at the name with some bullish favor based on an oversold monthly chart. However, calling a bottom is another story entirely and not something I feel overly strong about at this point.
General Electric Bullish Modified Fence
The good news for bullish General Electric stock contrarians is a modified fence spread can help with the potential conundrum discussed immediately above. This position reduces and limits risk by purchasing a call or bull call vertical, while selling a put vertical to finance some portion of the cost.
The primary objective is for the call spread or long call position to go in-the-money and make a profit as General Electric stock rallies. As the modified fence also minimizes risk relative to shares, this type position can work well for investors’ interested in accumulating GE shares on an additional drop in price.
Reviewing the options board in GE, one favored modified fence is buying the Sept $17 call and selling the Sept $11 / $9 put spread for even money. With shares at $13.44, the price is a couple pennies above fair value and would need only a modest pullback to get filled. Then sit back and hope for the best, which could mean buying shares with controlled risk for $11 or a margin of safety of 18% and maybe alongside a whale that could be well-underwater.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
