By now, we all know the General Electric (NYSE:GE) story. Once the titan of the global industrial economy, GE has turned into a shell of its former self thanks to operational mismanagement, excessive debt, and too many unrelated moving parts in its business model. At the same time, the global industrial economy has become increasingly less important as we have pivoted into the era of the digital economy.
GE’s results have tumbled sharply. Since 2007, its revenues have tumbled from over $180 billion to under $120 billion. Its profits have tumbled from over $15 billion to multi-billion dollar losses. GE stock price has tumbled from over $40 to under $10.
There is a light at the end of the tunnel, though. That’s why General Electric stock surged in early 2019. But the light is becoming increasingly less visible, clouded by a lack of progress on turnaround initiatives and escalating macroeconomic risks.
As a result, the best thing to do with GE stock is to avoid it for the foreseeable future. In the long-term, General Electric stock has huge turnaround potential. But, given the current apparent lack of operational visibility, that potential won’t materialize anytime soon.
The Turnaround Will Take Time
In early 2019, GE ‘s turnaround gained momentum.
Specifically, GE’s management started taking the right steps to improve the company’s long-term profit outlook. It divested unrelated assets, shed non-core businesses and used the proceeds from those sales to pay down debt . At the same time, by getting rid of unrelated assets and non-core businesses, its management was able to dedicate more time to improving the company’s core operations.
Investors loved the progress that was being made. They bought up GE stock in bulk. From early January to late February, GE stock rallied from $7 to $11.
That rally has ended because investors have realized that GE’s turnaround isn’t going to happen overnight. Instead, it’s going to take a long time.
As a result, while GE’s revenue and profit trends will eventually improve, investors shouldn’t expect the rebounds to show up in any meaningful way anytime soon. Investors should also expect that, until those improvements do show up, General Electric stock likely won’t move much higher.
All in all, then, the snail’s pace turnaround of GE will likely result in an equally slow turnaround of GE stock price. Thus, after exploding higher very quickly in early 2019, General Electric stock seems positioned to trade sideways for the foreseeable future until the company’s fundamentals surge.
Building Macro Risks Don’t Help
In the big picture, it doesn’t help that the macro-economic environment in which GE is attempting to execute a turnaround has materially deteriorated over the past several months.
In early 2019, the trade war was mostly talk and very little walk. The yield curve was somewhat – but not fully – inverted. The U.S. manufacturing sector was doing fine.
Now, in mid-2019, a lot has changed, and not for the better. The trade war has become a lot more walk. The yield curve has fully inverted. The U.S. manufacturing sector has significantly slowed.
Against that slowing macro-economic backdrop – which is particularly bad for GE’s core industrial markets – it’s tough to see the GE turnaround going smoothly. Instead, this turnaround promises to be bumpy and volatile, meaning that GE stock, for the foreseeable future, similarly promises to be bumpy and volatile.
The Bottom Line on General Electric Stock
There really isn’t any compelling reason to buy General Electric stock now. I get that it GE stock price can surge over the long-term if GE divests most of its businesses and doubles down on the Aviation segment. But that potential won’t materialize now, with the turnaround progressing at a snail’s pace and macro-economic risks escalating.
As a result, investors should stay away from General Electric stock for the time being. At some point, GE stock will be worth buying. That point is not now.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
