Following the stock market plunge in March, many equities have been rebounding with a vengeance. Even General Electric (NYSE:GE) has come back big, with GE stock rising more than 55% from its March low to the recent high.
But I don’t think General Electric is a stock to buy. Simply put, the fundamentals do not support the stock. Neither do the technicals. Let’s look at three reasons why investors should avoid GE stock right now.
Where’s the Bounce?
We’ve had a number of groups catch strong momentum over the last few months. First, technology stocks caught a bid, with many notable names running to new all-time highs. While some benefited from the novel coronavirus, others didn’t — like Apple (NASDAQ:AAPL). But that didn’t stop the group from running higher.
Then there was the “reopening America” trade, which benefited GE, as beaten-stocks began to recover. However, unlike stocks like Royal Caribbean (NYSE:RCL) or American Airlines (NASDAQ:AAL), which rallied more than 200% from the lows, GE stock could barely top a 50% rebound.
That sounds like a big rally, but keep in mind, the S&P 500 rallied almost 45% from its lows. GE barely outperformed, despite a peak-to-trough decline of almost 60%, nearly double the fall for the index.
At current levels, GE stock is up less than 20% from the coronavirus lows. Despite the market’s recent pullback, the index is still up 39%. General Electric is struggling and its underperformance shows. I don’t want to buy into a laggard.
GE Stock Has Poor Fundamentals
Not only is General Electric lagging the overall market, it also has lackluster fundamentals. I’m not just giving GE a hard time for the fun of it, either. It has made great strides in shoring up its business and new management has stepped up the company’s c-suite game.
Putting it kindly, General Electric had its work cut out for it before the coronavirus came along. However, that work was doable. And while I’m not saying that GE is going to file Chapter 11, the coronavirus has certainly made the job more difficult.
In GE’s most recent quarter, the company missed on earnings expectations, although it did beat on revenue estimates despite sales falling about 25% year-over-year. However, cash flow was the main focus.
Industrial free cash flow came in at negative $2.21 billion, almost double last year’s deficit of $1.22 billion. It was also worse than analysts’ estimate for a $2 billion fall.
CEO Larry Culp expects GE to generate negative cash flow for the year, and he sees an outflow of $3.5 to $4.5 billion in the second quarter. That was far worse than the consensus estimates looking for an outflow of $2 billion.
Maybe GE gets it together, but there are so many opportunities in this market — either buying secular growth stocks on a dip or trading momentum names higher — that I don’t want to go with General Electric at this time.
Trading GE Stock
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The underperformance is disappointing and the fundamentals are uninspiring. So it should come as little surprise that the charts do not look great for GE stock. I’ll be honest, if the technicals are there — even for a stock with poor fundamentals, like Nikola (NASDAQ:NKLA) — I’ll respect it.
But GE stock has nothing working in its favor right now. It’s the third reason we consider it one to avoid for the time being.
Shares are breaking below the 50-day moving average, as downtrend resistance (blue line) squeezes it below $7. Maybe $6.50 buoys the stock, maybe not — it doesn’t really matter right now.
GE stock doesn’t become attractive to me until the $5.50 to $6 area. On the upside, I need to see a move over the 20-day moving average and 23.6% retracement before there’s clear momentum in play. Until either of those developments, I’m staying on the sidelines. Further, under the circumstances, I only view GE as a trade, not an investment.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL.
