General Electric Company (NYSE:GE) will step into the earnings confessional ahead of the open this Friday, and there is a growing temptation to view GE stock as a potential contrarian play. After all, the company has slimmed down, divested many of its less profitable operations, and is replacing CEO Jeffrey Immelt with former GE Healthcare division head John Flannery.
If you’d like a detailed write up on why GE stock is not a contrarian play just yet for “buy and hold” traders, check out Vince Martin’s recent article .
Regular readers know that I am about as far from a “buy and hold” trader as you can get. In the past, I’ve speculated that GE could see a bit of a short-term contrarian bump from Flannery’s transition to CEO, and even (luckily) come out ahead in that respect. Such is not the case this time around.
The Flannery hype has faded quickly. What little bump GE received from the announcement is gone. And now, GE stock has managed to scrape together a bit of a rally heading into Friday’s quarterly earnings report.
Let’s make this clear, Flannery will have no impact on General Electric’s second-quarter results. He may not even have an impact on third- or fourth-quarter results later this year. You don’t just turn around a company the size of GE overnight.
With Immelt still at the helm, GE is expected to post a profit of 25 cents per share this Friday, less than half what the company earned in the same quarter last year. Furthermore, revenue is seen plunging 13.4% to $29.02 billion.
If those numbers weren’t bad enough, GE’s increased exposure to U.S. shale oil could be it’s undoing this quarter. Back in the first quarter, when analysts were considerably more bullish on oil’s prospects, Chief Financial Officer Jeffrey Bornstein said that the energy market remained “very challenging” in the first half of 2017.
For the second quarter, oil and gas revenue is forecast to decline to $2.94 billion from $3.22 billion a year ago and from $3 billion in the first quarter.
GE Sentiment and Options
Despite the fact that GE shares are down more than 15% this year, sentiment remains considerably bullish. For instance, EarningsWhispers.com places the whisper number for Friday’s report at 26 cents per share — a penny better than the consensus.
Furthermore, Thomson/First Call reports that 11 of the 16 analysts following GE stock still rate the shares a “buy” or better, while the 12-month price target of $31 rests more than 15% above the stock’s current perch.
Even GE options traders are riding the bullish bandwagon. Specifically, the July/August put/call open interest ratio currently sits at 0.53, with calls nearly doubling puts among near-term options. What’s more, the July 21 put/call OI ratio arrives only slightly higher at 0.69, pointing toward optimism among options most affected by GE’s earnings report this Friday.
Click to Enlarge Finally, July 21 implieds are pricing in a potential post-earnings move of about 2.5% for GE stock. This places the upper bound at $27.68, with the lower bound coming in near $26.32.
Before we get to this week’s GE trades, let’s recap last month’s recommendations. With GE stock reversing course after the Flannery news, the primary July $26.50/$27 bear put spread turned out to be a big winner.
With GE closing south of $26.50 for three consecutive days following July 7, traders should have closed this position out for a maximum return of around 150%.
Obviously, the much riskier July $29/$30 bull call spread was a complete bust, as Flannery and the restructuring team remained silent.
2 Trades for GE Stock
Bear Put Spread: With enthusiasm still lingering in the air for GE’s eventual turnaround, and plenty of bullish sentiment in both the brokerage community and the options pits, the real contrarian play on GE stock ahead of earnings is a bearish one.
GE’s recent bounce higher off 52-week lows near $26 provide ample room for a reversal following a disappointing quarterly report. Traders looking to capitalize on such a move might want to consider a July 21 $26/$26.50 bear put spread.
At last check, this put spread was offered at 12 cents, or $12 per pair of contracts. Breakeven lies at $26.38, while a maximum profit of 38 cents per share, or $38 per pair of contracts, is possible if GE trades at or below $26 when July 21 options expire at the end of this week.
Bear Put Spread: Since GE rarely moves as quickly as options traders would like, a less risky play in the same direction would be to trade an Aug $26/$27 bear put spread. This strategy gives you a bit more time for GE stock to decline and meet its profit target, as opposed to the July 21 series, which is all or nothing this Friday.
The Aug $26/$27 bear put spread was last asked at 34 cents, or $34 per pair of contracts. Breakeven lies at $26.16, while a maximum profit of 66 cents, or $66 per pair of contracts, is possible if GE closes at or below $26 when August options expire next month.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
