Due to the devastation caused by the novel coronavirus, several financially vulnerable companies have been left exposed. Indeed, it’s very possible that some won’t make it out of the tunnel. Although it’s too early to have an extremely negative view on General Electric (NYSE:GE), investors shouldn’t get complacent. Whenever you see a bout of strength in GE stock, you should take that as your cue to exit.
Aside from the oil industry, few other sectors have been hit hard like transportation. With General Electric providing the LEAP engine that goes into the once-popular Boeing (NYSE:BA) 737 Max jetliner, the narrative for GE stock has likewise gone dark.
Until the travel industry normalizes and people aren’t afraid to share a condensed space with each other, GE will likely suffer extremely turbulent trading.
For now, I wouldn’t play the contrarian hero. With General Electric, there are problems and then there are nuances to those problems.
For instance, GE developed its LEAP engine during a time of normal oil markets. Thus, their innovation was particularly remarkable, balancing power with fuel efficiency. Further, the LEAP engine worked perfectly with the 737 Max’s advanced architecture, which likewise emphasized efficiency. But with oil prices at record lows, the effort that went into those efficiencies just aren’t that important right now.
At some point, that will change. But time isn’t a luxury that GE stock has. Remember, General Electric CEO Larry Culp took the top job knowing that he had to fix the company without going into a complete overhaul. Given this restriction, GE needed almost everything to turn favorably.
Certainly, a global pandemic that harshly targeted the travel industry wasn’t part of the agenda.
Bad News Piling Up for GE Stock
Although airliners put on a brave face — until they couldn’t — their actions belied their confidence. With airline companies forced to cancel hundreds of thousands of flights worldwide, some resorted to converting their newly idle planes for cargo flights.
As Popular Mechanics reported in late March, American Airlines (NASDAQ:AAL) made an all-cargo flight, a first in 35 years. Given that many airliners begged for and eventually received government bailouts, this cargo conversion was both an act of ingenuity and desperation.
Unfortunately, desperation isn’t exactly a term you want to hear from one of your top industries, especially if you’re in the middle of a recovery effort. Looking further ahead, it’s hard to decipher when exactly consumers will start flying en masse.
As I’ve detailed in prior articles, pent-up demand is poised to bolster certain companies. But whether GE stock will receive such a benefit remains to be seen. With airliners, consumers may tiptoe back into flying. If that’s the case, you can expect deflated order demand for new planes and parts.
It also doesn’t help that recently, renowned investor Warren Buffett sold his stake in U.S.-based airline companies. According to Buffett’s assessment, “the world has changed” due to the coronavirus. Additionally, he will not invest in organizations that he believes will “chew up money in the future.” Naturally, this sentiment sank the majors in the space.
If that wasn’t enough, the decline in the airline business preceded the pandemic. Of course, the two fatal flights involving the Max jetliner hurt GE stock. But besides that, slowing demand for air travel, particularly for international routes, suggested that 2020 was going to be a lean year. Combined with an only partially resolved U.S.-China trade war, General Electric was going to face headwinds anyways.
Few Options Remaining
Most worrying is that the eroding oil market presents other challenges for GE stock. Primarily, the sector deflation disincentivizes investments in renewable energy solutions in the near term. Logically, with lower oil prices, the economic benefit associated with cleaner alternatives, such as electric vehicles, diminishes.
That’s not to say that EVs and renewables are suddenly pointless. Over the long run, I view the coronavirus as a catalyst for green energy. Why? Even though the U.S. is now a major exporter of oil, fossil fuels are deeply associated with geopolitical risk. For example, the brief oil price war between Saudi Arabia and Russia has threatened our oil industries, causing mass layoffs.
With a robust renewable energy industry, we can better insulate ourselves not only from severe price fluctuations but also from geopolitical pressures that threaten American livelihoods. But again, this is a longer-term framework and GE doesn’t have the luxury of time.
Due to the cascade of bad news, it’s better not to fight the tape. When you see shares pop, just sell into strength.
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.
