Investors dislike few things more than GE (NYSE:GE) at the moment. Read social media and you’ll see revulsion around the idea of buying into GE stock. As a former blue chip company that subsequently failed a whole generation of investors, many people have written off the company entirely.
While that’s an understandable psychological reaction, it leaves opportunity for less jaded investors. The truth is that GE is actually in decent shape, and has a great manager at the helm.
The company’s critics are living in the pas, and will be surprised when GE comes roaring back during the next economic upturn. Here are three positives about GE that the skeptics just don’t understand.
The Company Has Sufficient Liquidity
One big bearish argument has been that GE is supposedly heading toward insolvency. Last year, Harry Markopolos pushed those concerns to the forefront when he released a lengthy and bombastic report accusing GE of all sorts of financial crimes and predicting bankruptcy. Markopolos was famous for exposing the Bernie Madoff fraud. However, lightning didn’t strike twice. Markopolos’ GE report was widely criticized, and has now essentially disappeared from the public discourse.
What investors may not realize is how this was actually a net positive for GE. By putting all the ugly rumors and innuendo into the spotlight, analysts and management openly discussed the potential pitfalls facing GE.
There are no hidden skeletons in the closet anymore, as the Markopolos affair has aired any potential dirty laundry. When a short seller takes their best shot at a firm and misses the mark, it serves as a sort of affirmation of the company’s strength.
And to GE’s credit, they’ve done everything right to earn that trust over the past year. The company has aggressively sold assets. It hasn’t been a fire sale, however. CEO Larry Culp has managed to bring in top dollar for assets such as the biopharma business.
Meanwhile, GE continues to scale down parts of the business that would use more of the balance sheet. As a result, even during the sudden crash in March, there were no significant concerns about GE’s solvency. Say what you will about the company, but it’s financially solid enough to make it through a recession.
Aviation Won’t Be As Bad As Expected
Excluding the now sold-off biopharmaceuticals division, GE generated the substantial majority of its free cash flow from aviation in 2019. However, GE already has lowered expectations for this segment due to Boeing’s (NYSE:BA) problems. GE supplies the engines for the Boeing 737, so its grounding was a headwind. Add in the Covid-19 impact on the aviation industry, and investors are fretting about GE’s outlook here.
At first glance, that’s reasonable. GE is certainly going to see lower aviation profits in the next few quarters. However, remember that new plane orders are a many-year cycle. One year of disruption isn’t going to wipe out profits indefinitely. And to the extent that this mess causes lower prices for oil and jet fuel, it could help boost airlines and aviation in the longer-term.
As it is, Boeing stock has already doubled off the lows, and many airline shares are surging as well. Aviation has passed the darkest hour already. In a conglomerate like GE, there will always be some portions of the business doing well and others less so, however you don’t need to sell the stock merely because one division hits a slow patch.
Management Actually Knows What It’s Doing
Bad management is one of the most persistent claims against GE. I get it. Jeff Immelt had an uneven tenure at best. And John Flannery was such a disappointment that he barely lasted a year on the job. For people that enjoyed Jack Welch’s run at GE, it’s been nothing but heartache since then.
Throw in the multiple dividend cuts, and GE’s investor base has been burned repeatedly. They don’t trust the company, and they’re vocal with their complaints. It’s fair — but it’s also in the past. And that perception of ineptitude is now creating a discount for new investors.
The thing is that GE now has one of the best CEOs in the industrial space. Larry Culp guided Danaher (NYSE:DHR) to a nearly 500% total return during his time there. He knows how to run a conglomerate, and he’s already made sweeping changes to get GE into shape. Importantly, Culp has put his money where his mouth is. He’s bought GE stock aggressively. Bad management ailed GE in the past, but it’s no longer a factor.
GE Stock Verdict
In investing, you make the most money by taking an opposite position when the general consensus is wrong. In the case of General Electric, most investors are still judging the company — as it stands in 2020 — based on its mistakes from years ago.
When you look at the bearish arguments around GE, however, most hold little water going forward. A much stronger management team is in place now. The aviation sector is already starting to show some tentative signs of life. And talk of bankruptcy is simply unfounded.
By the time the naysayers come around on GE stock, shares will likely be trading a lot higher. There’s a huge wave of negativity around GE. Once the crowd finally figures out that the company is on the mend, early investors will reap the fruits of the turnaround.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
