Shares of General Electric (NYSE:GE) jumped more than 10% at one point on Thursday after the company received perhaps one of the most important upgrades of its long life. JPMorgan analyst Stephen Tusa upgraded GE stock from “sell” to “hold,” inspiring confidence among investors.
Why does this particular upgrade matter so much? Before any of GE’s now well-known issues surfaced, Tusa had uncovered its balance sheet concerns and possible cash flow problems. At the time, he was the only one on the Street to slap a “sell” rating on General Electric stock. This was two and a half years ago.
As GE’s problems began to unravel, Tusa uncovered even more issues. Asset sales and new management didn’t matter, as he continued to slash his price target ahead of eventual falls in the stock price. Because of his consistency and accuracy, Wall Street put more weight in Tusa’s research than what other analysts and even GE’s own management had to say.
About a month ago, we said there were three things investors needed to watch before buying GE stock. One of those catalysts were a change in tune from Tusa and John Inch, an analyst with Gordon Haskett and the second one behind Tusa to get bearish on GE. Tusa and Inch still maintain their $6 and $5 price targets, respectively. (Also, Inch still maintains his “sell” rating).
The other two catalysts we were watching for were a precipitous decline in the stock price (say to $6) and a recovery in its bond prices. We’ve actually seen the latter come to fruition, while the lowest the former found itself was $6.66. As an interesting side note, 666 was also the bottom for the S&P 500 in March 2009 amid the financial crisis.
So is it time to buy GE stock?
After a 30% post-earnings pummeling, investors have clearly repriced the stock to account for the company’s various liquidity risks and balance sheet obligations. The only issue? GE has become an incredibly complex conglomerate. Forced to liquidate assets at less-than-ideal prices after axing its dividend does not inspire much confidence. I will say though, former Danaher (NYSE:DHR) CEO Lawrence Culp is certainly a high-quality candidate to bring in as the new CEO. The question boils down to how much he can improve the situation and how quickly he can get GE out of the “critical concern” zone.
At What Point Is the GE Stock Price Compelling?
The massive discount that General Electric stock now trades at is due to the concerns over its balance sheet and cash flows. Those situations don’t need to improve dramatically for investors to come back to the name, but they do need to improve to the point where the concern for an “event” goes away.
But is GE finally a buy?
My biggest issue with GE stock at this point isn’t whether it’s a buy, sell or hold. It comes to comparable stocks. In other words, what else looks better after the market’s correction? Would I rather pile into names like Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and other balance-sheet leaders as they are 20% or more off their highs, instead of GE stock?
In most cases I would.
That being said, I would consider closing out my short position and/or long put positions at this point. The risk/reward simply does not favor the bears, even if GE stock does go slightly lower.
As for trading GE stock, bulls want to see shares push through the 21-day moving average and eventually get back above the $8 level. That said, bulls have to see GE stock price stay above the recent low. If the stock takes it out, $6 and possibly lower is back on the table.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL and GOOGL.
