Shares of General Electric (NYSE:GE) have been a complete and total mess this year. Ahead of Monday’s open, blockbuster news propelled GE stock significantly higher. Unfortunately, the close was uninspiring and quite frankly, so is General Electric stock at this point.
How can we know for sure when this loser has bottomed?
On Monday, shares closed higher by about 7% after the company announced that current CEO John Flannery will be replaced by former Danaher (NYSE:DHR) CEO Larry Culp. Culp was an absolute stud at Danaher, growing the company’s market cap and revenue five-fold during his tenure — which went through two major bear markets as he served at the helm from 2000 to 2014.
That said, Flannery seems to have clearly gotten the short end of the stick. He has only been on the job for 13 months and let’s be frank, the issues with General Electric are not his fault. He was brought in from the head of the one division that was doing well — healthcare — in an attempt to right the rest of this ship. Only this isn’t turning a yacht around in the middle of the ocean, it’s turning an airliner around in a marina.
GE’s crippling free cash outflow, unhealthy balance sheet and pension obligations are severely handicapping the company’s flexibility.
A New GE Stock
Here’s the problem with GE. As great as Culp was at Danaher, GE still has a plethora of issues. Because of the recently announced $23 billion write-down relating to its power business, management retracted its earnings and free-cash flow guidance for 2018. An update was not provided.
This was announced the same day of the CEO transition and underscores the ongoing issues with General Electric stock. But it goes further than that. A decline in earnings and another year of depleted cash flows show that, despite what some optimists have been hoping for, that a bottom is not yet in for the business.
That just goes to show how far “hope” goes as part of an investment thesis.
Further, some analysts have been talking about another dividend cut. A senior management official has confirmed that, at the very least, a discussion over whether to do so has taken place. For those with short memories, recall that the dividend for GE stock was slashed 50% in November 2017.
A further halving would take the yield down to about 2% — a reasonable figure when compared to Honeywell (NYSE:HON), 3M (NYSE:MMM) or United Technologies (NYSE:UTX). But there are two ways to cut a stock’s yield in half: either a big rally in the share price or by management cutting the payout. GE’s not taking the more attractive option on this one.
The point is that GE’s business continues to struggle. The good news is that its stock is starting to act better.
Trading General Electric Stock
Monday’s CEO-fueled action temporarily drove GE stock price up above $13. The move cleared its highs from September (good) but the stock was promptly rejected by the 100-day moving average (bad). Even worse though, is that downtrend resistance did not hold as support.
Perhaps that was as investors began to realize that even with Culp, General Electric stock still has big hurdles.
So how can we know for sure when GE stock has bottomed?
General Electric will report third-quarter earnings on October 25th. I would love to see shares consolidate ahead of the event, perhaps between Monday’s highs and the recent low range near $11.50.
Three weeks is a long time to wait in order to find out, but it’s better to be safe than sorry with GE stock. A bottom could come if we get a big dip on not-so-great earnings that gets bought up and pushed higher on heavy volume. Particularly if that breaks GE out of its intense downtrend.