Following the black-swan event that was the initial strike from the novel coronavirus, it was inevitable that airliners would eventually make their recovery. Though people will take precautionary measures for the greater good, it’s just not in the American spirit to shelter in fear indefinitely. Hence, the return of positive sentiment bodes well for General Electric (NYSE:GE) in theory. More flights equate to greater demand for equipment and maintenance services, which should drive up GE stock.
And that’s exactly what has happened over recent sessions. In the trailing one-month period (at time of writing), GE stock gained over 20%. Subsequently, data from the Transportation Security Administration shows that air travel demand has noticeably increased. While we’re far away from normal capacity, last month, passenger volume averaged 35.5% from the year-ago level. Again, not great but it’s a far cry from the single-digit comparisons we saw earlier this year.
Therefore, I can appreciate why investors have started to pile into GE stock as a contrarian play. However, this isn’t a time to load up the boat. Instead, I believe stakeholders of General Electric should use this opportune moment to sell into strength. Despite many improvements, GE remains a troubled organization with a less-than-credible path to recovery.
In the immediate future, investors should take a careful look at sharply rising new daily coronavirus cases. To be clear, frontline medical workers appear to have learned many lessons from the pandemic’s early phase, with the death rate of Covid-19 declining substantially. Still, investors shouldn’t get complacent — it’s not so much about what you personally believe about the pandemic, but rather the consumer and governmental response.
When you look at air travel data in recent days, there’s some evidence to suggest that the spike in cases is taking its toll on demand. For instance, the average passenger count between Oct. 1 and Oct. 26 was 843,700. From Oct. 27 through Nov. 1, the average declined to 772,732.
Of course, you don’t want to read too much into the numbers. But if travel demand is declining, a substantial portion of General Electric’s recovery narrative takes a hit.
GE Stock Is Bottom of the Supply Chain
To understand the problem affecting GE stock right now, we should look at the physical precious metal coins market. If you dive into this game, you want to be sure you know what you’re doing. That’s because by the time you as a retail consumer get your shiny new coin, every other player in the metals supply chain has already received their money, from the miner to the dealer to you.
Thus, for you to make some money, you must speculate that the price of the underlying asset will go higher than what you paid for it, plus whatever fees and/or taxes you paid. In other words, you’re at the lowest end of the supply chain and yet have the highest risk.
Frankly, that’s the current state of affairs for General Electric. Absolutely, it’s encouraging that travel demand is moving higher since this year’s lows. But the immediate beneficiary of that demand will be the airliners. Further, the industrial firm must hope and pray that travel demand continues to move higher.
Unfortunately, that’s not quite what we’re seeing. For one thing, we’re still in a pandemic, and coronavirus cases have jumped to an alarmingly high threshold. Even without this surge of infections, air travel demand was only a little higher than a third of last year’s volume. That’s nowhere near enough for GE stock to be a comfortable investment.
Moreover, it’s critical to note that General Electric really didn’t start rocking and rolling as a possible contrarian opportunity until last year. For all its controversies, that was when the President Donald Trump administration helped facilitate multi-decade lows in unemployment. And when the president boasted about all-time joblessness lows for communities of color? Technically, he’s right on the money.
So, in that economic context, it made sense that GE stock moved significantly higher last year. But 2020 is hardly 2019 — far from it. Therefore, the sustained recovery narrative is questionable, to say the least.
Trouble Brewing in Europe
If our own flood of new coronavirus infections wasn’t enough of a concern, Europe was wrestling with a second wave as we were hoping we could avoid a resurgence. Now, according to CNN, many countries in the region have imposed lockdowns and various nationwide restrictions.
Not only that, the area has suffered a rash of terror attacks. With so much going on, international travelers may stay at home for the next several weeks. This is particularly devastating because it’s coinciding with the festive holiday season.
Back home, American travelers will still find a way to see their friends and loved ones, which should provide some support for airliners. But for General Electric, being at the bottom of the airliner supply chain couldn’t come at a worst time. Therefore, use any bullishness in GE stock to exit out of this irrational investment.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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