From a fundamental perspective, there’s not much to like about General Electric (NYSE:GE). Some investors have a long-term horizon of five years, 10 years and even more. For them, they may not sweat the decline in GE stock if they buy now or did so recently. But for me, seeing GE slide 47% over the past 12 months and 27.5% so far this year is a huge turn off.
I’m not one to follow the direction of analysts blindly, but one man who’s been ahead of the curve is JPMorgan’s Stephen Tusa. This guy has been nailing GE stock and successfully called the big decline before it happened.
Perhaps he won’t lift his sell rating in favor of a neutral or buy rating or bump his $11 price target until the bottom is already in. Doing otherwise may result in him trying to catch a falling knife, something we’re trying to avoid as well.
So what’s changed for GE to question whether the bottom is now?
Trading GE Stock
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The charts are shaping up much, much better for GE stock lately. That has me cautiously optimistic, as we haven’t really had a big volume day to prove it. I would love a big decline on bad news, and then a reversal and close higher on the day with big volume.
So far, we haven’t had that. We’ve seen GE “pump fake,” meaning that it initially goes lower, then reverses higher on bad news. But all that’s done is suck in bulls and then lay down the hammer when GE inevitably made new lows.
Let’s break down what’s happening right now and investors can decide for themselves. Shares of GE stock had been clinging to the $12.50 lows, which ultimately gave way in August. A few months ago we said that GE was at make-or-break territory with downtrend resistance (blue line) squeezing shares lower, forcing it to constantly test its support.
It’s somewhat hard to see, but the last few candles show a decent decline and a reversal higher. That’s good, as it put General Electric back over $12.50 and above downtrend resistance. On Monday (the latest candle) it had a good rally, but backed off the 50-day moving average.
Hey, no one said this would be an overnight sensation. In my book, as long as GE stock is over downtrend resistance and $12.50, aggressive bulls can go long.
Valuing General Electric Stock
The problem for General Electric stock is that it doesn’t have growth. That makes it hard for the company to solve its pension problems and shore up its balance sheet. It also makes it hard to like GE stock vs. names like Honeywell International (NYSE:HON), 3M Co (NYSE:MMM) or United Technologies (NYSE:UTX).
Rather than using growth to solve its problems, the company has had to resort to several asset sales, the most recent of which was MRA Systems, an aircraft parts manufacturer, for $630 million. According to reports, GE will now sell part of its digital business as well.
Last November, GE halved its dividend, but because the stock has fallen so far, the yield is already close to 3.8%. That’s as free cash flow remain under pressure.
So now what?
Estimates call for sub-1% revenue growth this year and next year, while analysts expect a 10.5% contraction to earnings this year and just 7.5% growth next year. Meaning that General Electric stock will earn less in fiscal 2019 than it did in 2017.
For this, we’re paying 13.5 times this year’s earnings.
While not exactly expensive, GE stock isn’t that cheap given its lackluster growth profile. Still, if investors can rally the name from current levels, a bottom could be in. Even if shares fall after reporting earnings in a month, the bulls could build a cushion by then. Like I said, I wouldn’t go all-in on this loser, but at the very least, keep an eye on it.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
