While a popular saying among Wall Street traders is “Buy the dips,” there’s also the opposite saying, “Sell the rips.” And practically every time General Electric (NYSE:GE) rips to the upside, GE stock gets sold off.
Not long ago, the stock closed at its 52-week low. Worse yet, that same day, it reached its lowest price since 1991. Along the way to multi-generational lows, one can only imagine that many dip buyers have been disappointed.
They might also have been shocked to witness this iconic company’s shares fall so far. Besides, a highly diversified company like General Electric is supposed to be a safe investment, right? That might make sense in theory, but in practice, there’s little safety in buying and holding GE stock.
A Dire Prediction
It is true that General Electric is involved in a number of sectors of the American economy. Yet, the company is heavily dependent on its aviation segment. In fact, that’s the biggest part of General Electric’s business.
The data proves this. During the first quarter of this year, GE Aviation generated $6.89 billion in revenues. The company’s second-largest segment, GE Healthcare, generated a much smaller $4.73 billion in quarterly revenues.
And so, General Electric’s business model is strongly associated with the fate of the American airline industry. Specifically, the company produces jet engines and components. And in the wake of the novel coronavirus outbreak, that’s not necessarily a great market to be so heavily involved with.
How bad is that market? Put it to you this way: Boeing (NYSE:BA) Chief Executive David Calhoun predicted that it will take up to five years before the airline industry gets back to where it was before the Covid-19 outbreak.
Not only that, but Calhoun also made the dire prediction that it’s “most likely” that one of the major airline companies will go out of business in 2020. Calhoun didn’t specify which company, but for GE stock, does it matter at this point? It’s bad news regardless of the specifics.
It was all over the financial headlines. Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett did something he rarely does: give up on an investment. Actually it was worse than that, as Buffett basically gave up on an entire industry.
The Oracle of Omaha is famous for saying that his favorite hold time for stocks is “forever.” But apparently “forever” has a finite endpoint when it comes to the aviation industry. And so, Buffett admitted that he was wrong and relinquished his positions in several airline stocks.
His justification for this surprising U-turn was, in Buffett’s words, that the airline industry has changed in a “major way.” There’s no denying that Buffett’s right as the spread of the coronavirus has significantly decreased air-travel demand.
And the fiscal damage isn’t limited to the major airline companies. Since General Electric is in the business of manufacturing components for airplanes, the deterioration in airline-travel demand impacts this company as well.
Buffett referenced this issue when he suggested that the expected oversupply of airplanes “affects General Electric.” This would be a manageable fiscal burden if General Electric were in a strong financial position, but that’s simply not the case.
By the end of last year, General Electric’s pension liabilities approximated $95 billion. That’s an astonishing figure, especially for a company whose market capitalization is around $49 billion.
So it would be difficult to build a strong argument that General Electric can simply ride out the rough period in the aviation industry. GE stockholders shouldn’t have to ride it out, either.
The Takeaway on GE Stock
With Buffett providing a warning and the Boeing chief providing little in the way of hope, it might be best for investors to avoid positions in the airline market for now. And GE stock, unfortunately, would fall into that category.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.