Let me get right to the point: do not buy General Electric (NYSE:GE). If you are unfortunate enough to own GE stock, sell it.
This once-admired company has destroyed investment accounts across America over the past decade. For example, buyers — as recently as 2016 — have watched the price sink from $33 per share to around $13 today.
The recent news of a merger of one of its units and a surprise 8-for-1 reverse stock split may sound appealing. A recent company presentation is meant to give investors hope. But ignore the hype and look at the facts.
You should avoid GE stock because earnings have been sinking for years. Furthermore, the stock is still overpriced compared to what it is worth. A good rule of thumb is to never invest in something you do not understand.
Earnings Have Sunk Over the Past Decade
When we invest in any company, we buy the earnings. Of course, the idea is that earnings grow and increase company value and the stock price rises to reflect growth.
The story for General Electric stock is the exact opposite. Check out this graph of GE’s earnings-per-share over the past 10 years. Could anyone call this a predictable growth company? No.
Some might say GE is on the verge of a comeback, so now is exactly the time to buy. The problem with that view is trust. Given the earnings track record over the past decade, the company simply has not delivered results.
Not only are earnings declining, but it is very hard to estimate what earnings might be in the future. Some estimates say earnings will grow from 40 cents to $1.00 in the next few years. Maybe. But maybe not.
GE Stock Is Not Worth $13
The company’s own price-to-earnings ratio history gives a clear picture. As you can see on the chart, back in the glory days, General Electric commanded a price of about 21X to 23X earnings. More recently, the company was priced around 15X to 16X earnings.
Today, the company is priced at 30X earnings. Moreover, shares are still overpriced if we are generous and assume improved earnings two years out.
And that brings us back to the problem I mentioned earlier. What are the earnings going to be? How can we reasonably predict future earnings when results in the past have been so mixed?
History may not repeat itself, but it often rhymes.
GE has the same chance of disappointing results as a strong comeback. From my view, when there are so many other quality companies worthy of review, it simply makes no sense to bet on GE stock.
Simply put, even at $12 shares are the most expensive they have been in a decade. So what are shares worth? Apply the company’s normal P/E to earnings and shares are worth around $8 to $10.
Does that sound pessimistic? First look at the chart again and ask long-term shareholders how they feel.
Do You Really Understand an 8-for-1 Reverse Stock Split?
I didn’t think so. A reverse stock split is a corporate action to consolidate shares. A key investing lesson is to invest only in what you understand. Certainly it is possible to deep dive and learn and study the issue. But why do that? I have built a multiple 7-figure net worth over the years by following two principles: buy when stocks are cheap relative to their own earnings, and invest in something you generally understand.
GE meets neither of those principles.
The Bottom Line for Investors
General Electric is a well-known name, and the stock price recently stumbled on surprise news. But it is not a buy.
The company has a 10-year history of declining earnings, a market price well above what shares are worth and now information about complicated reverse stock splits. There are other high-quality companies worthy of our investment. Even if GE shares rise, why take the risk and the stress wondering if this company will finally pull it together?
As of this writing, Doug Morse did not have (either directly or indirectly) any positions in the securities mentioned in this article.