Fraud Allegations Make General Electric Stock a Speculative Bet

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For years now, General Electric (NYSE:GE) has failed to resemble any sort of a reliable investment. That’s a shame. No matter what, the company is an icon of American industry. Prior to the digitalization age, you could count on General Electric stock to give you steady, reliable returns. Now, the only thing that’s reliable is that the bloated and confusing organization will attract scorn.

Source: Pavel Kapysh / Shutterstock.com

But even with this new and negative reputation for General Electric stock, the underlying company fell to fresh depths. In the middle of August, financial analyst Harry Markopolos sounded the alarm on GE, accusing it of being “a bigger fraud than Enron.” To support his audacious claim, he produced a 175-page report detailing management’s alleged accounting shenanigans. After this stunning disclosure, the GE stock price tanked 11%.

Making matters worse is Markopolos’ reputation. For those unfamiliar with the financial markets, you might be surprised that one person can take the GE stock price down so sharply. However, Markopolos rose to fame when he blew the whistle on Bernard Madoff, who the media proclaims to be the “Ponzi king.” To me, he’s more like a multi-level marketing dirtbag calling you at 3:00 a.m. about some vitamin drink.

But my point here is that Markopolos has serious clout. Today, everyone knows about the Madoff scandal. But what many may still not realize was that Markopolos banged on regulators’ doors until the fraud came to light. And now he’s pounding the bearish table on General Electric stock.

You better know what you’re doing to level this kind of accusation.

GE Dropped Because of Markopolos’ Reputation, Not Report’s Substance

Years ago, I got into a debate with a fellow trader about investment advice. In short, his position was that information was tied to the source. To illustrate, he said he’d never take stock tips from a hot dog vendor.

In contrast, I replied that we should judge information on its own merits, whatever the source. From my point of view, advice from a renowned expert isn’t guaranteed to be profitable. Besides, I love hot dogs.

And I think this is the primary issue with the Markopolos report: His reputation preceded him and it unfairly tanked the GE stock price.

Let me be clear: I’m not suggesting that General Electric stock is the paragon of stability. Clearly, the underlying company has severe problems which it must overcome. But accounting fraud? You need serious firepower to back up that claim, and I believe Markopolos has fallen short.

For instance, in his actual report — and not someone’s editorial about it — Markopolos lamented that GE frequently changed its reporting formats. He then concludes that this is due to either fraud or incompetence. What? Those are extreme conclusions that don’t address the spectrum of other possible answers. Granted, the constant shift between formats is frustrating. But there’s nothing wrong with the accounting change itself. For example, Apple (NASDAQ:AAPL) no longer breaks down its iPhone quarterly sales. Are we going to assume massive fraud in Cupertino?

Again, this is not necessarily my defense of General Electric stock. But I don’t like to see high-level accusations based largely on the reputations of the involved parties.

Markopolos bagged a fraud whale with Madoff. The GE stock price continuously tests worrying support levels all on its own. But the mere existence of these two facts neither bolsters nor dissuades from Markopolos’ argument.

General Electric Stock Is an Interesting but Risky Trade

When GE’s management team responded that Markopolos was engaging in market manipulation, their retort had weight. That’s because the financial analyst has a credibility challenge to overcome.

I’m not talking about him writing on behalf of a fund manager shorting General Electric stock. That’s another story that I don’t want to get into at this time. But to be fair, Markopolos did disclose this conflict of interest. No, I’m referring to an even bigger credibility problem: If Markopolos is correct about his charge, how the heck did regulators not discover this on their own?

In his report, Markopolos claimed that GE used the “dog that didn’t bark method” by getting rid of the dog. In other words, GE deliberately hid financially damaging information from shareholders and regulators. But I just don’t find that plausible, considering that General Electric stock was a long-time mainstay of the Dow Jones Industrial Average.

You can’t just willy-nilly hide stuff when you’re under the world’s biggest financial spotlight.

As such, I believe the GE stock price got a raw deal from the fraud claim. And that to me makes shares an interesting trading idea because they could bounce back up, however briefly. After all, the report has already done its damage.

But again, let’s not do a reverse-Markopolos here. I’m not suggesting that General Electric stock is a contrarian investment. Right now, it’s a very speculative trade, but one that has a stronger probability of moving to the upside.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/fraud-allegations-make-general-electric-stock-a-speculative-bet/.

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