General Electric (NYSE:GE) was one of the hardest-hit stocks as the novel coronavirus stifled economic activity throughout the U.S. over the past few weeks. GE stock was an unfortunate victim of terrible timing— the company was in the midst of an impressive turnaround when its main lifeline, aerospace, was suddenly cut off.
But now that the U.S. economy is reopening and travel set to resume around the world, investors are starting to reconsider the conglomerate for long-term gains. I like GE’s comeback story without the added uncertainty that Covid-19 brings to the table. When you add the virus to the mix, I think it takes some of the shine off GE shares. It adds another layer of risk.
In January, GE’s growth prospects were phenomenal as new CEO Larry Culp cut costs and overhauled its image with added transparency. The biggest question mark hanging over GE stock is aerospace – when will it recover? Until that becomes more clear, GE stock isn’t a buy.
The Aerospace Dilemma
The largest part of GE’s business is making jet engines for the aerospace sector, but the tie-ups don’t end there. The company also leases aircraft through its GE Capital Aviation Services business. But this arm of the firm has been hit hard by the lack of travel.
For now, most are expecting airline travel to remain depressed over the next few years. That means GE and its customers will continue to suffer over the next couple of years, whether the coronavirus is under control or not.
Even in the advent of a vaccine, something that is still up in the air, air travel will take time to recover because of the economic devastation that Covid-19 has caused. In the U.S. and around the world, many of the job losses are likely permanent despite the re-openings. That’s going to hit air travel because people won’t be able to afford lavish vacations.
Plus, there’s some evidence that even when the Covid-19 outbreak appears to be under control, the public is inclined to stay within driving distance.
The Rest of the Business Can’t Carry GE
Looking to the rest of General Electric’s business, there’s not much hope. Its financial services have long been a drain on its resources. And, GE power was hemorrhaging almost $1 billion during a period of economic growth. You can only imagine how much worse that’s going to get throughout a recession.
Then there’s GE’s massive debt pile, which will likely grow larger as the company navigates through this crisis. Culp and his team regained investor confidence with the promise to pay down that debt and create a more financially stable organization. But staying afloat in such an uncertain market is going to thwart that effort.
GE Stock Is a Risky Buy
With that said, once the dust settles I like GE stock as a long-term play. Investors with a timeline of a year or more and willing to stomach a fair bit of risk can consider starting to build a position slowly.
GE stock is down more than 40% so far this year. That weakness may persist through the end of the year if Covid-19 isn’t brought under control ahead of the flu season. Plus, civil unrest in the U.S. and geopolitical tension with China threaten the stock market’s current rally.
The Dow’s meteoric rise in April and May put investors in a precarious position as the market is starting to look overvalued and overhyped. Many forecast another correction with an even better entry point for potential GE investors.
The Bottom Line
If you’ve got years and you can ride out some volatility, there’s no harm in starting to nibble on GE stock.
Beyond that, I believe the stock is too uncertain to be a good buy in today’s risky market. GE’s long-term prospects are enticing, but the next six months are likely to be extremely volatile. Snapping up a highly leveraged company that was already struggling before the economy started to slide doesn’t appeal.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.
