This Rally in General Electric Stock Isn’t Totally Irrational

Everywhere you turn, the fundamental prospects for General Electric (NYSE:GE) remains shrouded in doubt. As new CEO Larry Culp highlighted recently, the embattled organization is currently embarking on a “reset” year. By 2020, investors should see substantive improvements, which naturally bolster the case for General Electric stock.

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Of course, we have one glaring problem with this forecast. After years of dreadful market performances, the industrial giant simply lacks credibility.

Sure, the GE stock price has gained over 42% since the January opener. Under normal circumstances, this would spark much celebration. But try telling that to stakeholders that bought months earlier.

Furthermore, in 2018, General Electric stock dropped an alarming 56%. To break even, shares would need to jump an additional 61%. That’s really where the speculative argument wears thin for most prospective buyers. GE intrigued swing-traders during last December’s rock-bottom valuations, but not so much at present levels.

Poor Fundamentals and GE Stock

For many years, analysts and stakeholders blasted former CEO Jeff Immelt for destroying a once-iconic American institution. You don’t have to deep-dive the Google search engine to find a litany of criticisms.

But I must give credit to our own Dana Blankenhorn for dressing Immelt down in a blisteringly humorous way. Back in the summer of 2017, Blankenhorn warned readers that he’s not interested in General Electric stock unless Immelt leaves. He wrote:

Immelt’s exit may be the stock’s only hope. Everything he touches turns into tin, and what he lets go turns at least into silver.

Take Synchrony Financial (NYSE:SYF), the credit card unit spun out to shareholders in 2014. Since then, Synchrony is up 43% and GE 13.5%.

If you think that sounds good for GE, the S&P 500 is up almost 19% since then.

Of course, Blankenhorn’s wish came true, first with John Flannery’s short tenure, and later with Culp. The bad news, though, is that the GE stock price has only received a negative impact. Since Culp’s hiring, shares are down 12%, inclusive of this year’s incredible rally.

As many analysts, including our own James Brumley pointed out, Culp is an outsider. Formerly head of Danaher (NYSE:DHR), Culp is refreshingly a straight-shooter regarding GE’s problems. However, his idea involves a rather predictable and unimaginative tactic: divest like there’s no tomorrow.

Certainly, getting rid of underperforming assets, particularly when you’re neck-deep in debt, offers tremendous value. But it also sacrifices future revenue streams, which General Electric stock can’t afford.

Therefore, Culp can’t “talk up” shares with mere straight-talk. The substance just doesn’t exist, which likely limits the GE stock price.

General Electric Stock Needs a Higher Power

So with the stark bearishness against General Electric stock, am I also running for the hills? I don’t blame you if that’s your mentality. No matter how you look at this company, it’s an extraordinarily-risky proposition. That said, I can’t shake the feeling that GE has at least one shock rally left in it.

First, investor sentiment has shifted very favorably for General Electric stock, but it’s difficult to see. It’s a shame that Culp took over when he did, right when the broader markets melted down. Personally, I view GE’s volatility in the final quarter of 2018 more as a secular breakdown rather than as an individual defect.

But the biggest surprise factor for GE could come from arguably its most disappointing segment, power. Last year, I wrote about the inherent inefficiencies of so-called renewable-energy sources. Although platforms like wind and solar appeal from a marketing perspective, they’re not panaceas.

While renewable energy “works,” it is difficult to scale. If you want more energy, you need more real estate. But most countries aren’t like the U.S. blessed with abundant territory. As human populations increase, space comes at a premium.

You then have the inevitable question: is clean energy worth sacrificing land that could be used for additional housing? At some point, that answer becomes no. This is where the company’s power division saves the day. Simply put, traditional power plants are both space and cost-effective.

Of course, I’ve been very wrong about the direction that General Electric stock ultimately took. But if you’ve got the patience — and isn’t this what everyone is saying now? — GE could legitimately surprise you.

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

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