A turnaround in progress continues to be challenging for General Electric (NYSE:GE). It’s aptly named to be sure. But with the Fed, other market allies and a friendly price pattern offering solid counter support, GE stock remains in position to bring good things back to life for investors. Let me explain.
It certainly had the looks of a lights-out situation for the broader market as the Dow Jones Industrial Average was sent plunging nearly 5.50% last week. Behind the hard-hitting sell-off, less-supportive sounding “Fedspeak” and growing worries over an increase in the number of novel coronavirus infections as the U.S. economy reopens, got the best of investors.
Unsurprisingly, shares of General Electric certainly didn’t prove immune. The once-DJIA blue-chip — and today, simply an embattled company struggling with a turnaround that’s been made more challenging due to its Covid-19-weakened aviation business — plunged an even-steeper 8% for the five-day period.
But this week has brought out the bulls in GE and the market.
Last week’s concerning monetary talk from regulators has been replaced with surprise corporate bond stimulus action by the very same folks at the Federal Reserve. The move prompted a reboot of investor confidence and sent the broader market reversing strongly into Monday’s close to unwind steep, earlier losses. Tuesday only improved Wall Street’s animal spirits.
Led by a well-diversified trio of IBM (NYSE:IBM), Chevron (NYSE:CVX) and Home Depot (NYSE:HD), the Dow is up 4.7% and now recouping the bulk of last week’s losses. At the same time, shares of General Electric are well-bid by nearly 8%.
On top of Monday’s improved environment for risk assets, stronger-than-expected retail sales, a $1.0 billion U.S. infrastructure plan being mulled by the Trump administration and word from across the pond of a major drug breakthrough against the coronavirus are sowing the seeds for bulls. But General Electric’s market out-performance may have additional fuel, too.
This week Bank of America reiterated its buy rating and above-the-market price $11 target on GE. Analyst Andrew Obin noted that aviation-related write-downs for the company’s Capital Aviation Services unit look manageable and the business should continue to be cash flow positive. Specifically, the firm expects impairments of $800 million to $2.2 billion from the business and average free cash flow of $1.5 billion through 2022.
And about that 12-month, 46% premium in General Electric shares? It sounds optimistic to say the least. But given what’s cooking on GE stock’s monthly price chart, it may be time for investors to make more than just a reservation to buy shares.
GE Stock Price Monthly Chart
Source: Charts by TradingView
The big picture is technically shaping up nicely for investors in this name. The monthly chart reveals a roughly 1.5-year double-bottom variation. With positive divergence from the stochastics indicator and shares confirming the low earlier this month, there are decent reasons to see General Electric shares as being on the mend. The formation also bullishly sets up a potential higher-low formation relative to the stock’s 2009 low.
Is the price action in General Electric perfect? No. For one, it would be nice to have a full crossover signal from stochastics. As well, there are broken Fibonacci levels and a bearish flag pattern which promote the always-real possibility of shares revisiting their 2009 financial crisis low. But asking for perfection from an investment is overrated and more importantly, elusive.
Net, net I’d give the benefit of the doubt to a General Electric turnaround that will continue to be challenging, but one which could easily yield above-average returns for shareholders willing to give the stock a chance. And if like me, investors wish to add a real layer of security to that position, purchasing the September $6 put / $9 call collar for a modestly discounted price of $7.40 versus $7.47 in GE stock looks like an even stronger risk-adjusted opportunity.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.