As of this writing, General Electric (NYSE:GE) stock has posted nine consecutive days of losses on Wall Street. That’s a long losing streak. And it’s all because investors have grown increasingly concerned that the rapidly spreading coronavirus outbreak will have a bigger and longer impact on the industrial conglomerate’s operating results than previously anticipated.
That is, when the coronavirus outbreak was limited mostly to China, most investors thought that any negative economic fallout from the outbreak for GE would be constrained to only a few of the company’s businesses. They also thought these negative impacts would hit in the first quarter before subsiding.
Now, though, the virus has spread to various other parts of the world. The likelihood it turns into a global pandemic is fairly high. That means that all — not just a few — of GE’s operating businesses will be damaged, and the impact could extend beyond the first quarter.
I get all that. I do. But I still think that GE stock looks like a great buy as shares approach the $10 mark on this sell-off.
My bullishness breaks down into three parts. First, base case for the coronavirus outbreak is still for the virus to subside by summer. Second, the global industrial economy is positioned to go through a V-shaped recovery once the virus fades. Third, GE is doing everything right to improve profitability and cash flows in 2020 and 2021.
Given these factors, I say buy the dip in GE stock once technical support shows up (and it should around $10).
Coronavirus Is Still A Short-term Issue
Coronavirus is big, scary, and volatile. But it’s also just an epidemic. And like other epidemics over the past fifty years, it will pass.
Warmer weather — which tends to kill influenza outbreaks like the coronavirus — coupled with strict quarantining, high consumer awareness, swift government responses, and expedient vaccine progress will ultimately put this outbreak to bed within the next few months.
Yes, things will be scary and volatile until then. The market and GE stock will likely react negatively every bad coronavirus headline. But, come May, coronavirus will likely be old news. Economies across the globe will be back to normal, and stocks will be in rebound mode.
Industrial Economy will Improve
The good news is that the coronavirus headwinds hitting GE stock today are short-term in nature. The better news is that the global industrial economy is positioned for a strong v-shaped recovery once coronavirus headwinds fade.
Before the coronavirus hit, signs were starting to emerge that the depressed global industrial sector was starting to rebound on the back of enormous fiscal stimulus in 2019 and easing U.S.-China trade tensions. The coronavirus outbreak has since temporarily put that rebound on pause. But, in response to the outbreak, two things have happened.
Central banks across the globe, mostly the People’s Bank of China, have injected even more fiscal stimulus into their economies. At the same time, the U.S.-China trade war has more meaningfully cooled off, as neither country wants to economically fight the other while both are dealing with more important health and safety issues.
If fiscal stimulus and easing trade tensions sparked the start of an industrial economy rebound in late 2019 and early 2020, then more fiscal stimulus and more trade tension easing will continue that rebound in mid-2020. As such, the global industrial economy is positioned for a strong v-shaped recovery once coronavirus fears fade.
General Electric is Making the Right Moves
The last part of the bull thesis on General Electric is that, as the industrial economy tide rises in mid and late 2020, GE stock will be one of the fastest rising boats in that tide.
That’s because this company is doing everything right to downsize and simplify operations, and improve profitability and cash flows. The company has divested non-core businesses. They are shedding non-core assets. They’ve closed a bunch of manufacturing sites, and have gutted the expense model. The workforce has shrunk to levels not seen since the 1950s. Debt levels has similarly come down in a big way.
But, more than cutting unwanted fat, General Electric is also adding much needed muscle. They’ve doubled down on investments in next-generation opportunities like energy and health. Indeed, in that space, the company just won a $1.8 billion deal with the Democratic Republic of the Congo.
Put together, all these moves mean that GE’s profit margins and cash flows are dramatically improving, and that revenues and profits should rise at a steady pace over the next few years.
Assuming so, then $1 in earnings per share seems entirely doable for this company by fiscal 2022. GE’s average forward price-earnings ratio of the past five years is about 16.5. Based on those two metrics, a reasonable 2021 price target for the stock is $16.50, which is 50% above where shares trade hands today.
Bottom Line on GE Stock
Coronavirus didn’t kill the GE stock turnaround. Instead, like all other epidemics, the coronavirus will pass, and likely within the next few months. Once it does, GE stock will rebound with significant velocity, thanks to what will be a strong v-shaped recovery in the industrial economy come mid-2020, as well as improving profit and cash flow trends at General Electric.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
