Let me start this note by saying that it is a joy to see General Electric (NYSE:GE) regain some respect. This is a great American company that lingered too long into the penalty box. Up until recently, it was the butt end of jokes. Some Wall Street experts added insults to injury by downgrading GE stock even when it was $7. This was wrong, and investors finally recognized it.
Today’s note is going to sound bearish but I remind you that I’ve recommend it several times before. Most recently, I suggested it had upside potential about a month ago. Back then it wasn’t hip to be long GE. Now everyone is on board, but therein lies my main caution.
Recently, experts like Goldman Sachs blessed it as a great idea for next year. My concern here is about the price, not company failure. I have great confidence in GE’s continued success in this long recovery. It’s a process, not a moment in time.
Even through the toughest year on record, GE’s management finally silenced the naysayers. I don’t fault those who sold it last year. The company gave us many reasons to doubt it. The embarrassing stories that came out along the way are the stuff they write about in books. But finally, and after many shift changes, they put together a team that got the job done. Now it is still a massive company with nearly $100 billion in revenues last year. That’s 60 times bigger than Shopify (NYSE:SHOP) and 153 time bigger than Zoom (NASDAQ:ZM).
Yet, each of those has a bigger market cap than GE.
Moreover, the structure of the company is clearer than ever now. General Electric operates in four major segments. Three of them are hot topics now, including power, healthcare and renewable energy. The fourth, unfortunately, is swimming upstream — the aviation industry is struggling from the Covid-19 spread but that is also on the mends.
GE Stock Valuation Is Not a Problem Yet
Valuation matters, and it’s getting a little bit stretched near term. That is okay for now because in absolute terms, a 24x forward price-earnings ratio is not bloated. But it’s at a level where investors usually seek growth.
Management just restructured its operations, so the sales measurement relative to the past is misleading. It will normalize over time. Meanwhile it could become a sticky point for critics. Remember, I am a fan of GE so I do have a good spin on this potential rub.
GE stock now sells at only one times sales. There is absolutely no hopium baked into it. This means that the investors are completely realistic and they know what they are doing owning it. If I am long the stock I can stay in it for the long term. Meanwhile, those looking to enter now should be patient. There could be better starting points lower and soon.
The other reason I hesitate starting big new positions now is the extrinsic risk from the indices. They just won’t quit setting new highs, even in the face of bad news. This leaves the door open for a blindside correction. As things stand now my estimate is that it would be a run-of-the-mill dip. If it comes it would bring great opportunities to buy GE stock.
Starting partial long positions is a happy medium. It relieves the itch and tamps down the FOMO feeling that runs through all of us.
Patience Is a Virtue Now
Technically there are also reasons to temper the short-term enthusiasm. GE stock rallied 60% from the September bottom and 45% since my last write up. It deserves a rest. It is now near the 50% Fibonacci retracement of the correction pandemic crash. Another, smaller sign is the Nov. 18 candle that looks like an island. It now becomes a hurdle that the bulls need to overcome. These are not stock killer concepts but mere reasons to pause or fade a rally. I don’t expect a complete collapse but the entry into the stock would make so much more sense $1 lower.
I expect there will be support all the way through $8, so it is not a short here. But there is also level resistance from prior battles. Zooming out to the weekly chart also shows that it has entered a pivot zone. It has been in contention since the crash of 2018.
Basically it is trying to break out of a hideous descending channel of lower-highs and it reached the edge of it. It will take a few tries to punch through. The bulls can eventually do it, but it will be a slog from here. Most of the easy work is done.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
