Talk about coincidence. Back in early 2009 when financial markets globally were reeling from a housing sector meltdown, the S&P 500 touched a low of 666 before proceeding to start a bull run that has lasted nearly a decade and counting.

Fast forward ten years. Just a few days ago, shares of General Electric (NYSE:GE) hit a post-recession low of $6.66. Ever since hitting the infamous Devil’s number, GE stock has bounced significantly higher.

This coincidental action has some investors claiming that the worst is over for GE stock. They argue that the stock has fallen enough, that there are some valuable underlying businesses here, and that leverage reduction over the next few years through divestitures should power a rebound in GE stock.

I’m not convinced.

Over the next several years, GE stock will head higher thanks to leverage reduction and continued growth in the Aviation, Healthcare and Transportation businesses. That big rebound won’t happen today, however, or any time soon. Instead, things will get worse before they get better.

As such, there’s no rush to buy the dip in the GE stock. This stock will remain weaker for longer. Investors can afford to wait for operational improvements to pave the pathway for a brighter tomorrow. Until that happens, there’s no reason to buy GE stock, despite its coincidental $6.66 low.

It Gets Worse Before It Gets Better

When I look at GE stock right now, I don’t see much to like. Consider the following:

• GE is sitting on $115 billion in debt on the balance, and free cash flow to service that debt is negative year-to-date. Meanwhile, rates are going up, and that puts more intense pressure on the company’s huge debt load. Debt-heavy stocks tend to underperform when rates are rising.
• Industrial profits were down 5% last quarter, and profit margins shrunk by 180 basis points, both worse than their year-to-date trends. Thus, growth is slowing and ugly at a time when the global economy is broadly strong. What will happen when the global economy cools in 2019 and 2020, as most economists expect it to? Nothing good.
• GE recently cut its quarterly dividend from 12 cents to 1 cent per share. That’s a big cut, and it means that yield-hunters are no longer stalking GE stock. That removes substantial investor demand from the equation. Not surprisingly, since that dividend was cut, GE stock has shed more than 30%.
• Analysts are throwing in the towel on GE stock, with many firms cutting their price targets and issuing bearish notes over the past few weeks. Stocks with eroding analyst sentiment tend to fall.
• Oil prices are falling, and that’s a bad thing for GE’s already struggling Oil and Power businesses.
• General Electric stock still trades at 10x forward earnings, which really isn’t all that cheap considering this company’s compressing profits and huge debt load.

These are the headlines that investors are dealing with today. Nothing about any of those headlines implies a need to buy the stock today. As such, so long as these negative headlines stick around, GE stock won’t bounce back.

I think these headlines will stick around for the foreseeable future, meaning that things will get worse at GE stock before they get better.

But Things Will Eventually Get Better

To be sure, things will eventually get better for GE, and GE stock will eventually bounce back.

Not all of General Electric is a complete mess right now. GE still operates very healthy Aviation and Healthcare businesses which have long-term staying power and growth potential in stable demand industries. The Transportation business is also doing pretty well, and it has healthy and stable long-term growth fundamentals.

Between those three businesses, GE’s annualized profits last quarter were about $11 billion. Let’s assume that these are the only three businesses at GE. Taking out $2 billion for interest expense and 20% for taxes, $11 billion in revenues should lead into about $7 billion in net profits. If you throw a market-average 15 forward multiple on that, you arrive a valuation of over $100 billion. As of this writing, GE’s market cap stands at under $60 billion.

From that perspective, the long-term upside thesis is compelling. But, you need a lot of things to happen before GE stock gets a $100 billion-plus valuation again.

Namely, you need some serious leverage reduction. GE stock won’t head higher so long as it sits on $115 billion in debt with anemic free cash flow in a rising rate environment. You also need some asset and business divestitures, the sum of which will clean up the financials and allow management to focus on the healthy businesses. And, you need concerns regarding a looming global recession to fade, because industrial companies trade with the economy, and a bad economy isn’t the type of environment in which stocks like GE rally.

You are getting some of those things right now. GE’s recent announcement to establish a new, independent industrial IoT company and sell a majority stake in ServiceMax is a good start. That cleans up the financials a bit. It simplifies and streamlines the model some. But, it isn’t a panacea that will fix every problem at the company. Instead, it’s a step in the right direction.

Investors need more of these steps before the stock will bounce back to $10-plus levels. Until then, there’s too much uncertainty surrounding GE stock to make it a strong buy.

Bottom Line on GE Stock

Eventually, things will get better for GE stock. But, they will get worse before they better. As such, there’s no rush to buy the dip in GE stock. Instead, patience is the most valuable skill here and now.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.