It is tough to argue the pros of owning a stock that is down 41% year-to-date when the markets are setting one record after another. This is the case with General Electric (NYSE:GE) and there is no imminent catalyst for GE stock on the horizon.
Today’s point is that eventually this once-industry titian will recuperate some of the respect it lost in the last four years. It is worth owning for the long term investment portfolio.
To look at what happened to GE and its stock is saddening. This once was a mighty American company that has fallen on hard times. The worst part about this is that this was during an epic bull market that still won’t quit.
Not even the problems from the virus and the worst economic conditions are slowing down the buying. Risk appetite is astonishingly voracious, yet GE stock falls through the cracks.
Perception Is Not Necessarily Reality
Perception is that it’s a loser, but in reality it is far from it. General Electric is still a powerhouse with $95 billion in yearly sales and $3.5 billion in free cash flow. This is still a whale of a company, yet investors choose to gobble up businesses that hardly have any sales like Nikola (NASDAQ:NKLA) and Zoom (NASDAQ:ZM), because they deal with sexier segments within in the new tech world.
Meanwhile, we will still need the things that GE provides.
Because its offerings are old concepts and not as contemporary as the cloud, investors label GE a has-been company. They brought some of this on themselves because of a bunch of self inflicted wounds done by prior management. The current team is working hard on repairing the damage to earn Wall Street’s credit into next year.
This stock is definitely far removed from the line of sight of Robinhood traders who are only interested in chasing headlines. One day they are chasing Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL) for their upcoming split dates, or like on Monday, they bought the airline stocks on vaccine news.
Eventually, if GE continues to repair itself, it will prove itself worthy of attention and be an investable thesis once again. GE stock is stuck in muck from the quarantine crisis. It has failed to bounce far off the bottom so it is still off the trader radar. But this usually means that the upside opportunity is more likely larger than the downside risk. It’s hard to fall far from a bottom.
Get Long GE Stock For Free
Today the opportunity is to bet on this old American icon company to make a comeback into next year. The trick is to do it with little out-of-pocket risk. The traditional way of participating is to buy GE shares at face value. This places the investment immediately at risk and leaves no room for error. While fundamentally it’s cheap with a 15x price-earnings and .6 times full year sales, it is always better to place a buffer from current risk. To do that I can use options to get long the stock instead of owning the equity.
Technically, the GE stock chart shows strong support at the lows of 2020. Unless the markets in general collapse, I can count on that to hold for a while. The idea is to sell risk below support to generate income, and buy upside calls to capture the upside. It is best to do this in tranches so to leave room to add on dips.
I can sell the January 2022 $5 puts and buy the same contract $7 call. The net should be almost cost neutral yet it gets me long GE for no out-of-pocket expense. If it falls below $5 then I must own it there. Given the current stock metrics this would be just fine.
Regardless of how good this specific opportunity, if markets in general correct then all stock will follow. Even if GE does everything right but the stock market crashes, then this opportunity would also be foiled. But the good thing about it is that the structure here has no out of pocket risk and a 20% buffer from current levels.
To recover from the quarantine crash is one thing but to break records is silly. Back in February we had record-breaking employment, whereas now we have record-breaking unemployment and a horrid economy. The macroeconomic conditions now are far worse then February and arguably have never been worse. Also the threat of the novel coronavirus is still here and without a vaccine. Caution is still warranted and this trade makes some room for it.