While the broader market is rebounding, investors should continue to avoid General Electric (NYSE:GE). That’s a difficult proposition for some investors. Many have traded GE stock often or own it from a much higher price. It’s harder to walk away from at that point, particularly as it hovers near $6.50.
This presents investors with a problem. On the one hand, GE stock has been a massive laggard. On the other hand, the airline space — and thus GE — could be in play for a bounce-back trade.
This comes as the U.S. continues to focus on reopening the economy and as the public goes back to business as usual with seemingly little regard for the novel coronavirus.
That sets up in two different camps: trading GE and investing in General Electric.
Trading GE Stock
The case for trading GE stock is a simple one. The share price is cheap, the stock is beaten down and any sort of “relief” could propel it higher by 20%, 30% or more in a relatively short amount of time.
First, a glance at the chart shows some reasons for bullishness. The stock has reclaimed its 20-day moving average and downtrend resistance (blue line). It also hammered out a very nice low near $5.50. This process played out over three days, with shares refusing to break below that mark.
For bulls to maintain momentum, they’ll want to see GE stock reclaim and close above the 50-day moving average. If the stock does that, it puts the 23.6% retracement in play at $7.31, followed by the 38.2% retracement near $8.50.
Second, the U.S. is getting back into motion. During the five-day stretch between May 21 and May 25, TSA screened at least 250,000 passengers each day. Three of those days exceeded 300,000 passengers.
While that’s a far cry from the 2 million to 2.7 million people it screened during the same period a year ago, it’s the best stretch in months.
For instance, during the same period a month ago, the highest screening number was 123,464. Two of the days logged less than 100,000 passengers. In the five days prior to the most recent five-day stretch, the highest figure was ~253,800, roughly equivalent to the lowest figure in the most recent reading.
While this is better news for Delta Air Lines (NYSE:DAL), United Airlines (NASDAQ:UAL) and even Boeing (NYSE:BA), it also benefits GE. The company generates a lot of its business from the aerospace sector. As travel recovers, so too should the related stocks.
Investing in General Electric
However, there are massive differences in buying a stock for an oversold bounce and buying it for its business.
When we look at a company like Twilio (NYSE:TWLO) or Microsoft (NASDAQ:MSFT), the fundamentals are attractive. Perhaps the valuations are high, but that’s because it has “all the magic.” That is, the technicals and the fundamentals are aligned, while Covid-19 is having a limited (or even positive) impact.
When General Electric reported earnings on April 29, it beat top-line expectations but missed on earnings estimates. Revenue fell about 25% year-over-year, while the coronavirus sapped about $1 billion from its free cash flow results.
For the quarter, industrial free cash flow (FCF) came in at -$2.21 billion. That was worse than the expected FCF loss of $2 billion and below last year’s $1.22 billion FCF deficit. While we’re seeing a rebound in airline traffic, it’s still down tremendously year-over-year. Further, the airlines are bleeding cash.
It’s hard to imagine they are lining up to add more jets to their fleet at the moment. While the rebound in activity is encouraging, it’s reasonable to think this could be a multi-quarter if not multi-year drag on the industry. In that case, GE’s aviation unit could continue to struggle.
From a trading perspective, GE could have some upside and has a well-established bottom, giving bulls a clear-cut risk/reward. For an investment though, I’m not all that enticed by GE stock.
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.