General Electric (NYSE:GE) is no longer the old icon that it once was. Over the last few years it fell out of grace in a bad way. And when the going got tough, everyone ran and hid. Fans of GE stock were scarce and analysts threw it to the wolves last year.
The pandemic disruption didn’t help either. Luckily, GE stock eventually built a trough and is clawing its way back out of it. The rally back has been awesome. From the May lows to the March highs, it rallied 165%. Last week, it fell into a pothole almost big enough to be a recession. The drop from high to low was 17% in just three days.
This is good news for those who want to own it for the long term.
First let’s assess the macroeconomic conditions within which all stocks trade. The bulls are in charge of the price action on Wall Street. This is in spite of tough conditions but thanks to extreme governmental help. We are nearing the launch of a $2 trillion stimulus package, which is the largest of its kind. This means that GE stock can rally if it wants to with a slight tailwind.
What was critical to the turnaround was finally establishing a stable and competent management team. They finally got their act together and slowly have gained investors trusts.
I wrote about the upside opportunity last year when it was still under $7. Back then I shared how investors could get long GE stock for free. That thesis was an epic win.
Traders Reacted Irrationally with GE Stock Last Week
Now it’s time to consider the prospects going forward. I don’t mean of the company because they are still executing well. My concern is over the price action.
Investors are not acting rationally these days. The shenanigans from the Reddit hoopla are adding to the confusion. Last week, GE announced a deal that would bring them $24 billion in cash. Then up to $7 billion more in an equity stake in AerCap. Until they divest themselves after the lockup period, GE would still be in the leasing business with AerCap. That deal was not a reason to sell the stock.
It’s relatively easy to make upside bets when the stock is in an abyss. Now it’s a little trickier because GE stock is finished with the easy rally. The bulls have momentum still but from here they have to earn it. For example, last week it crashed on positive headlines, but that’s where the new opportunities for trading will be.
On one hand they announced an asset sale of their leasing arm. But they also muddled the news with a 1-for-8 reverse split, and the traders panicked. I fail to see the negative aspects of these developments. The one part brings in cash, and the second has no bearing on the actual company value. A reverse split changes the face value price of the stock and nothing else.
There Is Strength Going Forward
A sleeker and leaner company makes for a meaner GE stock going forward. The fundamental metrics doesn’t necessarily say that things are going the right way. There is a steady decline in revenues. In reality they are reinventing themselves by shrinking to grow. A closer look would reveal increasing margins and decreasing debt-to-equity ratios.
What got them in trouble wasn’t just one event or action. Years of neglect piled up and created an ailing business. The old management had many mistakes along the way that in hindsight seem silly. Even when they figured out they had problems, they dragged their feet fixing them. Until this current team got it right, GE stock fell precipitously from inadequate leadership. That source of trouble has been removed so dips are buying opportunities.
Now it’s a healthier business that has focus. They are in four segments that are within trend. The whole world is seeking clean energy, better healthcare, aviation and power generation. GE is in all of them. They continue to divest assets that do not serve these segments. They are not afraid of making deals like the one from last week to further shore up their balance sheet.
The Exciting Opportunity
Here comes the exciting part of the write up. Technically speaking, the GE stock chart shows a potentially big trigger at $15 per share. If the bulls can break through they could overshoot $6 to $8 from there. It won’t be easy and there will be resistances at $18 and $21, to name two levels. But not many thought it could go from $7 to $13 either.
Owning GE stock for this opportunity and the long term makes sense. As long as markets are bullish, it will rally, too. The short-term hurdle stems from the correction it suffered last week. The bears have the upper hand until the bulls yank it back from them. Therefore, I’d wait for the trigger above $15 to chase it. Or if it falls back near $12.50, I’d buy that dip. Alternatively, traders could sell puts now regardless. Then they’d be long GE with room for error.
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.