General Electric (NYSE:GE) is the epitome of a bad, and dare I say financially abusive, relationship. On the surface, GE stock tantalizes with its low market capitalization Moreover, the underlying company has an array of businesses that in theory acts as a hedge on each other. In other words, GE has the potential to become Honeywell (NYSE:HON).
The difference, of course, is that Honeywell isn’t a dysfunctional mess. Sure, it’s presently not the most stable name in the markets. Nevertheless, Honeywell shareholders are on pace to see double-digit gains or fairly close to it. On the other hand, unless a miracle happens, General Electric stock will surely generate double-digit losses.
That’s a real shame. No matter how you feel about the organization, General Electric is an American icon. Contrarians reasoned that its business diversity could spark a comeback. When I first started writing about GE stock, I agreed with them. Later, it became apparent that I was dreadfully wrong, and thankfully, I reversed course.
But now I’m sort of back on the bullish bandwagon. This year, I’ve sided with the contrarian perspective. Take this with a bucketload of salt, but possibly, the bad news is baked into GE stock. I believe that may be the case because the severity of the declines of General Electric stock have eased dramatically over the last several quarters.
Going with the obvious, negative trade on General Electric stock could therefore result in unintended consequences.
But that premise, as we just found out, could be derailed by even more bad news. Specifically, UBS recently cut its price target on GE stock from $16 to $13. The financial institution cited deterioration in the power market, which may force GE to cut its overhead. However, those cuts would negatively impact GE’s growth, causing the jack-of-all-trades entity to spiral into a Catch-22.
So, why am I still giving General Electric stock a chance?
GE Stock Is Being Hurt by a Misconception
As with any analysis of GE stock, caveats are in order. I’m not suggesting that this tired, confusing company deserves to be the largest component of your portfolio. If you somehow got that impression, please take a step back and reconsider what I’m saying.
But if you approach this with the right mindset, General Electric offers an imperfect but potentially viable contrarian investment.
First, we must address UBS’ price target cut. While the announcement sounds awfully bearish, my contention is that it’s old news. The last time the media discussed the disappointing GE Power division in-depth was after the company’s second-quarter 2018 earnings report. That occurred about a month and a half ago.
Moreover, UBS did not include any new insights. It just rehashed what everyone already knows: the power market stinks. But how bad does it really stink?
Keep in mind that the renewable energy sector is putting considerable pressure on the power industry. As CNN Money noted, “Power plants are switching away from fossil fuels like coal and natural gas in favor of wind and solar.”
But wind and solar are probably fads. I say this because of Sir Isaac Newton’s second law of thermodynamics; namely, you can’t generate free energy. Furthermore, you can’t generate efficient energy from renewable energy platforms.
I’ve previously blasted people’s misconceptions regarding solar energy. But now, let me share my thoughts about wind turbines: they’re a complete waste of time (and money). Earth may not have enough land to accommodate the number of wind turbines necessary to replace global energy demand.
I suspect that GE’s leadership team understands that. Perhaps that’s why most insider transactions involving GE stock since 2015 have been buys.
Smart People Acting Stupidly Hurts General Electric Stock
In many ways, GE stock is down because otherwise smart people have a stupid fascination with solutions that don’t work.
But we’re witnessing early signs that common sense and science are turning the tide. Recall that while GE Power’s revenues slipped year-over-year in Q2, the unit’s top line also handily beat consensus estimates. It may take some time, but I expect the power business to continue to beat expectations
Of course, such upside surprises won’t be surprising if you understand the facts. Renewable energy sources are neither powerful nor convenient. Plus, wind turbines kill wildlife.
For now, the scientifically and economically illiterate leaders and influencers hold the keys to GE stock. But when stupidity costs people money, they will abandon even their most deeply-held political agendas. After that occurs, don’t act shocked when GE returns to greatness.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.