General Electric (NYSE:GE) has been crushed, but under the circumstances, who can be surprised? From peak to trough, GE stock is down 55% from its February highs.
There’s a trifecta of concerns weighing on General Electric though. First, the S&P 500 is down about 35% from peak to trough, while the CBOE Volatility Index (VIX) hit its highest level since the financial crisis. That’s an obvious negative for the stock — and almost all stocks.
Second, GE has its own company-specific issues. There’s a reason shares went from ~$30 in December 2016 to sub-$7 in December 2018. Free cash flow and debt concerns have been like an anchor for this name for a while now.
Lastly, the deep concerns over the aerospace industry are weighing on GE. Boeing (NYSE:BA) shares have nosedived. Delta Air Lines (NYSE:DAL), American Airlines (NASDAQ:AAL), United Airlines (NASDAQ:UAL) and others have crashed too. With so many unknowns in this space, orders for new aircraft are certainly a concern.
Aerospace is one of General Electric’s strongest units, and if this space takes a hit, it’s clear why GE stock has been under pressure.
What Now?
Current 2020 estimates call for earnings of 55 cents per share on revenue of $90.42 billion. The latter will fall 5% year-over-year, should GE report in-line results. However, given the impact from the coronavirus and what we’re seeing unfolding in the aerospace industry — from cratering flight counts to bailouts from Congress — investors need to assume these current estimates are inaccurate.
While the present situation creates a struggle for General Electric, that’s nothing new for the company.
From 2016 through 2018, GE generated revenue of $119.6 billion, $120.4 billion and $121.6 billion, respectively. However, net income for those years came in at $8.8 billion, negative $5.8 billion and negative $22.3 billion, respectively.
During that three-year span, GE had a free cash flow deficit of $8.7 billion. In 2019, free cash flow came in at a positive $2.6 billion, but a net loss of $4.9 billion was recorded. These were year-over-year improvements though, and while major concerns are still present, it suggests that 2018 may have very well been the bottom in its business.
While the biggest worry for General Electric — bankruptcy — seems off the table, for now, investors are still leery. As revenue and free cash flow dry up due to coronavirus uncertainty, it’s hard to calculate what the financial impact will be. Sadly, so many of the outside forces weighing on GE stock still have unknown outcomes.
So how can GE have up to 50% upside potential?
Trading GE Stock
GE stock has been cut in half in just over a month, falling from ~$13 in mid-February to sub-$6.50. The stock actually took out what now appears to be extreme lows from the fourth quarter of 2018.
The move in GE was deserved. The company does not have strong financials and there are several negative catalysts stressing the stock. That being said, those stressors may present opportunities.
If this was another extreme low, General Electric could have serious upside. Shares bottomed around $6, with a 50% move sending the stock to the underside of prior uptrend support (blue line) around $9.
On Tuesday, GE climbed to the top of its recent trading range (blue box), closing near $7. A 50% rally from this level is more difficult and will require the stock to reclaim prior uptrend support. However, should it do so, a rally of this magnitude would take shares to about $10.50. It may not get all the way to this point, with a number of key moving averages in the way.
But investors who can nibble the stock in the $6 range may find that serious gains are possible. On a close below $5.90 and perhaps investors will consider stopping out. GE stock is not perfect, but the risk/reward may favor the upside for aggressive bulls.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
