Mere words can’t fully explain General Electric’s (NYSE:GE) horrific implosion. Prior to its late-October selloff, the GE stock price was already deeply under water, approaching 30% losses for the year. But less than a week prior to its third-quarter 2018 earnings report, the once-vaunted company fell into crisis mode.
Not helping matters for General Electric stock was that Q3 was an absolute stinker. Against a deflated consensus earnings per share target of 20 cents, GE mustered only 14 cents. Not to pour salt on an open wound, but General Electric also fell short on revenue, generating $29.6 billion against a forecasted $29.92 billion.
But as our own Bret Kenwell pointed out, the GE stock price faced more pressing issues. Primarily, the company is a cash-flow disaster, with expensive obligations to multiple parties. One of those is to the shareholders in the form of dividends. When that went, so too did its market value.
And if you thought things couldn’t get worse for General Electric stock, they did. Following the Q3 report, shares settled above $10. However, that only lasted for 48 hours. Just in this month, GE lost over 24%. Year-to-date, the company is down 57%, ranking it 154th among this year’s worst U.S.-traded stocks.
That’s not a recipe for a stable, conservative investment, and I’m not going to say that it is. At the same time, I don’t want to pick on GE stock merely due to the crowd mentality. Sure, it’s incredibly risky, but General Electric also offers something substantive for speculative traders.
Don’t Mistake Cause and Effect in GE stock
It’s a common question: which came first, the chicken or the egg? While this inquiry is beyond the scope of this article, it serves as a cautionary tale. When analyzing the GE stock price, we should consider the primary catalyst.
If you read bearish articles about GE, you’d swear that the valuation erosion is due solely to the industrial giant’s poor fundamentals, and no one with a modicum of intellectual honesty will argue otherwise. However, did the bulk of the damage result from purely GE-connected issues, or were outside headwinds at play?
I’d argue the latter, and here’s my reasoning. General Electric stock tanked while the broader markets suffered worrying losses. Yes, GE would have likely fallen in a bull market, but the severity would also be mitigated.
Consider that Honeywell (NYSE:HON) is GE’s closest competitor. HON shares fell sharply in October, and aren’t doing well this month. Similar firms like 3M (NYSE:MMM) print almost-equally disappointing technical charts.
If General Electric was uniquely terrible, we’d see the GE stock price decline, and its superior peers rise. Instead, this storm is sinking all boats.
Power Represents Hidden Potential for General Electric Stock
Another sharp criticism directed against General Electric stock is the underlying company’s remaining businesses. Some of them have potential, while others appear to be liabilities.
The consensus points to the organization’s Power division as the biggest concern. In fiscal 2017, Power represented General Electric’s largest revenue-maker at just under $36 billion. That holds true today, which if you follow industry trends, isn’t a good sign.
Right now, everybody not named President Donald Trump is obsessed with clean and renewable energy. In theory, the principle sounds like a win-win. Rather than risk polluting the environment, we can acquire energy through the sun or the air. Coincidentally, GE’s Renewable Energy represents one of the firm’s smallest divisions.
But as I argued previously, renewable energy is a misconception. Yes, you can derive practical energy from solar and wind. However, these processes are incredibly inefficient. Further, the infrastructure to actualize renewable energy is overly expensive, making it economically irrational.
You can test this concept for yourself. Would you rather cook with an electric stove or a gas stove? If you chose the former, you don’t know how to cook!
The GE stock price Undercuts Aviation’s Growth
Of course, most people dismiss the Power argument because currently, it’s losing money. This contrarian thesis requires faith that the masses will come to their senses regarding renewable energy. Therefore, it’s understandable that the GE stock price ignores this potential.
That said, the one component the markets can’t ignore is the company’s Aviation business. Last year, this segment generated over $27 billion, and it is demonstrating consistently strong growth. In the most recent report, management reported Aviation sales of $7.48 billion. This is a 10% lift from the year-ago quarter’s haul of $6.82 billion.
But it’s not just about growth metrics. General Electric has invested heavily in next-generation technologies. By 2020, management estimates that they will connect 60,000 jet engines to the internet. Theoretically, this integration should save fuel costs and, more significantly for everyday folks, cause fewer transit delays.
Bottom Line for GE stock
Make no mistake about it: GE stock is mired in a terrible situation. Even if they catch a few breaks, management faces an uphill battle.
But I’d also like to caution against going overly bearish against the company. Since the start of 2017, General Electric has dropped nearly 75%. That’s reasonable perhaps for a company facing utter devastation. My argument is that it’s premature to call the coroner. GE stock is ugly, but it still has signs of life.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
