In my last article for General Electric (NYSE:GE), I mentioned that emotions drove the GE stock price. Over the past few years, a litany of grievous financial problems sank shares of the once-proud American icon. Even a hastily strung together charge of accounting fraud temporarily impacted the market valuation.
But because the news was so awful, a risk existed that any positive developments would have an extraordinary effect. After a certain point, the bearish position becomes too risky without fresh negative catalysts. For instance, General Electric stock picked up quickly after financial investigator Harry Markopolos dropped his bombshell allegation of accounting fraud.
However, the GE stock price has jumped dramatically over the last several trading sessions. This time, it’s harder to make the argument that shares are merely moving on reactionary emotions. Right before Halloween, the industrial conglomerate released its results for the third quarter of 2019. Surprisingly, on both per-share profitability and revenue, GE came up with critical beats.
The margin of victory was impressive as well. Against a consensus earnings-per-share target of 11 cents, GE delivered 15 cents. On revenue expectations of $22.93 billion, the company rang up $23.36 billion. As CEO Larry Culp put it, this represented a “transformation” of the narrative for General Electric stock.
Of course, emotions played a large role in pushing the GE stock price up double digits immediately following the report. Still, because expectations have been deflated for the embattled organization, the question is, what’s next?
Essentially, some substance is now driving General Electric stock. And with that comes higher expectations. Should contrarians who profited from this surprise rally take those profits off the table?
GE Stock a Perplexing Case
Conservatively speaking, the best course of action is to pocket these outstanding gains. Obviously, this is because General Electric stock remains a deeply troubled investment. Aside from its Aviation business, the other units don’t exactly inspire confidence.
For example, GE loves to talk a lot about renewable energy. Currently, it fits positively into the heightened narrative – almost hysteria, in my opinion – about climate change. Of course, the company features a robust renewables business. The problem, though, is that it’s just not profitable. It may never be.
I say this because alternative energy sources like wind and solar are not efficient. At the very least, you need massive amounts of land to implement these technologies. Even worse, they’re not environmentally and ecologically friendly, particularly to wildlife.
But the efficiency problem is the most critical: this immediately hurts the profitability case for the GE stock price.
However, the aviation results were huge for the embattled company. As you know, the broader industry absorbed a big shock with the grounding of Boeing’s (NYSE:BA) 737 Max 8 jetliner. Airliners that significantly used the Max 8 in their fleet, such as Southwest Airlines (NYSE:LUV), had to make significant adjustments.
But the news came at a bad time for General Electric. In fact, it was a double whammy. The Max was Boeing’s most popular airplane and GE makes the LEAP engines that the Max utilizes.
Thus, GE finding a viable pathway to growth amid the Max grounding represented a huge boost of confidence. Further, it implies that once the Max resumes operations, a harsh headwind will fade from the GE stock price.
It also means that management’s Q3 pep talk wasn’t just corporate-speak: they have substantive evidence to back up their recovery claims.
A Risky Path Forward
One of the biggest psychological barriers in gambling on General Electric shares is this year’s robust performance. Since the beginning of January, the GE stock price has jumped over 58%. Given the fundamentally risky nature of the company, the fear about holding the bag is real.
That said, Larry Culp has a successful track record in turning companies around. Though this is surely his biggest challenge yet, he’s bringing home the goods. Even in questionable areas such as renewable energy platform, GE’s offshore wind turbines may offer a viable solution.
Plus, its more traditional Power division offers effective solutions, especially for smaller countries that may not have the land resources to accommodate renewable energy technologies. Yes, this is a speculative, forward-looking assumption. But that’s also why General Electric stock has pronounced risk-reward dynamics.
So, should you gamble on Culp and GE stock? It’s going to come down to your patience and risk tolerance. If you decide to buy, just realize that the bullish argument has some weight to it.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.