The Long-term Speculative Case for General Electric

If you observed General Electric (NYSE:GE) shares this year absent any context, you’d assume this is one of the top industrial giants. Since the beginning of 2019, GE has jumped over 56%. By any measure, this is a robust return. Yet look beyond the print – and you don’t have to look far – and you’ll see a possibly controlled disaster.

Source: Jonathan Weiss /

Essentially, this is the argument that underlines InvestorPlace contributor Jonathan Berr’s recent write up on General Electric. According to Berr, General Electric’s CEO Larry Culp deserves credit for reinvigorating what was once an inevitably destitute investment. To accomplish this, Culp had to make tough decisions. Yet they pave the way for continued momentum in GE stock.

Still, Berr doesn’t hold back any punches. Those decisions that I mentioned were incredibly painful. For instance, General Electric had to restructure its pension benefits, an already thorny issue among retiring baby boomers. Furthermore, management had to divest key assets just to stay afloat.

Of course, you can’t cut yourself to growth. Eventually, General Electric’s core businesses must start decisively reversing their negative trajectory. Here, analysts either see the glass half empty or half full. While revenue trends are positive for GE’s big units like Power and Renewables, several fundamental headwinds remain. Also, other areas like GE Capital and Healthcare present worrying narratives.

If you’re thinking about buying GE stock, I can only say that this is an extremely speculative investment. Larry Culp must engineer the greatest comeback in business history to make shares viable again.

Honestly, that’s very unlikely. However, with a little science and a lot of time, General Electric can make that comeback. But before we get into it, we need to have a science lesson.

The Unfortunate Politics of General Electric

A recent academic study revealed something that we all know by now: American teenagers are lagging their East Asian and European counterparts in reading, math and science.

When it comes to General Electric, stakeholders should especially worry about the latter discipline. Unfortunately, this is the greatest irony of our time: inundated with scientific innovations, we have little-to-no idea how they work. Partially, I blame the extreme-level climate change advocates.

Wherever your politics lie, I think we can agree on one point: those who push alternative or clean energy as a panacea for global climate change can be misguided.

Compromise is the scientific reality that underlines all energy sources. If I want robust, reliable and practically viable energy, combustible or otherwise depleting catalysts represent the only solution. If I don’t care about getting to work on time, alternative energy might be appropriate.

Petr Beckmann, late professor of electrical engineering at the University of Colorado once argued that sunlight is extremely dilute. According to Beckmann:

[solar energy] comes in at the rate of 1 kilowatt (kW) per square meter (about eleven square feet) at the best of times—when the sun shines unobstructed and perpendicular onto the collecting area. That 1 kW/m2 is a value that will never change upward; no level of technology, no amount of money, no genius of human inventiveness can ever change it…

Forget the science: you know this instinctively. If you stand in sunlight, you’ll get a sunburn. If you stand behind a fighter jet in full afterburner, you’ll die. Put differently, sunlight (or wind) is not powerful and dense enough to produce immediate, practical power.

An Underappreciated Business

What does the above (and unsolicited) science lesson have to do with General Electric? Everything, really.

In years past, GE’s Power division was the unquestioned revenue generator of the industrial giant. Ignominiously, though, Power has significantly lost its influence over the years, falling from revenue of $35.8 billion in 2016 to $27.3 billion in 2018.

One positive to bring up is the company’s Aviation unit. Over the same time frame, revenue of this unit increased from $26.2 billion to $30.6 billion. Still, if GE stock is to enjoy a sustainable rally, Power has to come through at some point. Because let’s face facts: GE’s Renewable Energy is interesting, but it’s not growing at the pace it needs to mitigate Power’s decline.

Fortunately, science smiles favorably on GE stakeholders and prospective speculators. In addition to the “permanent” limitations of clean energy resources, climate fascists have another challenge to their delusions: a growing world population.

And it’s not just the nominal growth that will strain renewables. Rather, it’s the transition of developing countries into fully fledged developed status. And what is the central hallmark of developed nations other than rabid energy consumption?

The science and demographics are so powerful that they’ll cut through any politically induced insanity. According to some estimates, electricity demand alone could increase by more than 50% by 2040. Whether we like it or not, no single energy source is likely to feed global demand. We need them all and then some.

Did someone say GE Power?

The Classic Race Against the Clock

Because of the inundation of extreme climate change activism, politics is clouding General Electric’s most potent business unit. That’s music to contrarian investors’ ears. Undoubtedly, it’s also music to Larry Culp’s ears, if he reads my articles (he doesn’t).

However, the one thing that doesn’t favor GE stock is time. No one, no matter how bullish will argue that the industrial giant offers comforting financials.

In many ways, General Electric is like Tom Brady, perhaps the greatest quarterback of all time. At 42 years old, he’s playing remarkably well. That’s the good news. The bad news is he’s 42 years old.

But the playbook for Brady’s team, the New England Patriots, is simple: just do enough to protect Brady and his magic arm. Give him enough time and even a 42-year old Brady is more effective than a 24-year old benchwarmer.

And that’s the situation with GE stock. The underlying company has a surprisingly realistic chance at a recovery. But it needs to stay afloat for the political winds impacting the energy machinery to shift. Granted, this is a huge gamble. However, at least rest assured that it’s not a completely reckless one.

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

Article printed from InvestorPlace Media,

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