General Electric (NYSE:GE) continues to reel from fraud accusations. General Electric stock plunged earlier this month after Harry Markopolos announced that GE has hidden an accounting fraud “bigger than Enron and Worldcom combined.” His revelation of the Bernie Madoff scandal has bought him some credibility. However, he also belongs to a hedge fund that would profit from the demise of GE.
This connection has inspired a backlash against this report. GE also issued a firm rebuttal, one made more credible by GE CEO Larry Culp buying $2 million worth of shares.
Whether Markopolos made a credible argument, investors received a reminder of the toxic assets GE once held and could still hold. Although GE stock looks poised to recover in the long run, the possibility of fraud means investors should stick to speculative positions only.
General Electric Stock Should Eventually Recover
I’ve long referred to General Electric stock as a “speculative buy.” I have stated this on the belief that aviation and healthcare remain strong. However, I also stated that toxic assets not revealed to the public could remain on GE’s balance sheet. Also, to the report’s point, one cannot discount possible accounting fraud.
On the surface, the condition of GE’s balance sheet looks poised to improve dramatically. The company held $87.45 billion in debt as of the last quarter. Numerous asset sales will help pay down that debt. Its remaining portion of Wabtec just sold, and it plans to unload more of GE Capital’s assets. It should also complete its divestiture of Baker Hughes, the sale where Markopolos calls into question some of the accounting. GE will also sell its biopharma assets to Danaher (NYSE:DHR), the current CEO’s former company. All of these sales should eliminate more than $40 billion in long-term debt.
Possible Fraud and Toxic Assets Priced Into GE
However, the problem with GE stems from what we do not know. Investors should notice that General Electric stock has not recovered from the allegation. As of the time of this writing, the GE stock price stands at about $8 per share as it flirts with 2019 lows. Whether true or not, the report serves as a reminder of the possible toxic assets remaining on the balance sheet.
Under the short tenure of previous CEO John Flannery, both investors and the company board became frustrated by the “constant drip” of new issues. That appeared to have ended under Larry Culp’s leadership. That showed when the recent revelation of issues at GE Aviation due to Boeing’s (NYSE:BA) delays related to the 737MAX came quickly.
However, the Markopolos report has possibly brought back that feeling. If that accusation proves true, investors will not feel a drip, but a deluge. Investors can then consider General Electric stock finished.
Should You Buy GE Stock?
Due to the accusations, the speculative part of the buy case for General Electric stock has moved to the forefront. The company and its CEO vigorously defended GE following the report. However, the lower stock price shows that investors remain wary.
Investors still have good reasons to put money they can afford to lose in General Electric stock. At least from outside of the company, GE now appears forthcoming about its past and present issues. The “constant drip” of new problems has gone away. Also, the firm has downsized itself and begun to apply cash from asset sales to its massive debt. Assuming we know everything, this recovery should send General Electric stock much higher in the coming months and years.
However, the inner workings of a company happen away from the eyes of the average investor, and, for that matter, columnists at InvestorPlace. We all know that toxic assets on GE Capital’s balance sheet played a significant role in the 2008 financial crisis. As some might recall, the company needed a $12 billion loan from Warren Buffett and later, a $139 billion loan from the government to save itself. Before the crisis, GE Capital accounted for the majority of company profits. Today, it does not make up a large part of GE. However, the parts that remain seem to still concern investors.
General Electric stock could eventually bring investors massive returns. However, with the company unable to totally discount the possible existence of toxic assets or fraudulent accounting, investors should consider GE a higher-risk equity.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
