History suggests that General Electric (NYSE:GE) stock is a buy here. As I write this, General Electric stock trades at $6.60. The stock has bottomed at those levels before.
During the financial crisis, in March 2009, GE stock touched a closing low of $6.40. It would clear $10 before the month was out, and finish 2009 above $14. On Dec. 12, 2018, during the market’s last correction, GE closed at $6.45. By February, the stock was back above $10.
After a sell-off of nearly 50% in little over a month, General Electric stock is re-testing those past lows. And no doubt some investors believe history will repeat.
I’m one of those investors — but not because I’m a bull on GE. Rather, as I’ve argued consistently during this sell-off, I believe U.S. stocks as a whole will bounce back. That rising tide should lift most boats, including General Electric.
But I also argued last month, with GE still in the double-digits, that the stock wasn’t the best play for investors looking to buy the dip. I still believe that’s the case.
General Electric simply isn’t what it was in its glory days. The current situation creates real challenges, both short-term and long-term. There are quality stocks all over the market available at a steep discount to where they traded just weeks ago. Many, and maybe even most, of those stocks have a stronger case than GE stock right now.
A Smaller GE
Under chief executive officer Larry Culp and before he arrived in 2018, GE has been shrinking itself. At this point, the business is basically down to only a few segments: Power, Renewable Energy, Aviation, Healthcare, and GE Capital. (There’s a small portion of the Lighting segment left, and GE Digital as well.)
GE Power has been struggling for years. The turnaround effort in that business is not going to be helped by what increasingly looks like a short-term, worldwide shutdown. Renewable Energy has potential, but burned almost $1 billion in cash in 2019, according to the Form 10-K filed with the U.S. Securities and Exchange Commission.
It’s Aviation, Healthcare, and Capital that really drive equity value here. And that’s not good news.
GE Healthcare actually should get some help from the current situation. General Electric said just this week that it is producing ventilators around the clock to meet demand. CT scanners and ultrasound machines may see a spike in demand as well.
But that’s only one segment. In the other two businesses, disaster looms.
The Aviation Shutdown
GE Aviation is facing years of challenges at this point. Revenue already was pressured by the grounding of the Boeing (NYSE:BA) 737 MAX. Demand for aircraft — and for the engines GE makes — now seems headed to zero.
The likes of American Airlines (NYSE:AAL) and Delta Air Lines (NYSE:DAL) are parking their aircraft. Boeing is looking for a bailout from the federal government. The aerospace industry seems to be collapsing.
That’s a near-term problem for GE Aviation. It could be an even larger problem for GE Capital. GE Capital Aviation Services is the largest commercial airline financing company in the world.
That’s obviously not a good business to be in right now. And after GE Capital suffered billions in losses during the global financial crisis, there’s now the risk it will lose more as the airline industry shuts down.
Add to that short-term losses in aircraft engine manufacturing and high-margin sales of engine parts, and the impact on GE stock will be significant.
Better Plays Than GE Stock
To be sure, this doesn’t mean General Electric is going bankrupt. The aircraft industry will recover at some point. So will the economy and the stock market.
But it does mean that what at best was going to be a multi-year turnaround under Culp is going to take even longer. And it does mean that GE stock should be falling in this environment, as there are material near-term pressures on the business. Lower interest rates — and a declining stock market — will even exacerbate the company’s still-significant pension problem.
Look around this market. There are many stocks that have fallen sharply, with basically zero short-term impact.
In recent days, I’ve highlighted Facebook (NASDAQ:FB) as a company who may get a short-term boost from homebound users — yet whose stock is down 30%.
Nvidia (NASDAQ:NVDA) has dropped 40%, but remains the best-in-class play in a semiconductor industry where megatrends will drive demand for years when the economy recovers.
Those are just two examples. There are quality companies on sale across this market who will see enormous growth in the recovery.
Yet even once normalcy returns, General Electric may need to shrink still further. Simply put, that’s not the kind of company investors should be buying right now, even if GE stock probably is too cheap.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
