If General Electric Stock Has Upside, Use It to Take Profit

General Electric (NYSE:GE) may not be headed for the garbage heap. However, just because a company can survive doesn’t mean it’s a worthy investment. In this light, GE stock fits the description. 

The General Electric (GE) logo on a building
Source: Sundry Photography / Shutterstock.com

The company has done a good job. That may not be something investors thought they would read at the top of this story. 

But it’s true – General Electric’s management team has done well lately. That’s particularly true given the impacts of the novel coronavirus. However, CEO Larry Culp & Co. can only do so much with this struggling conglomerate. 

GE was once at the pinnacle of the industrial sector. It had its hands in everything from energy to aerospace, with solid growth and dependable businesses, all while paying out a handsome dividend. It was the envy of the sector.

But then poor managerial decisions (before Culp’s arrival), a bloated balance sheet, massive pension obligations and M&A deals that were, quite literally the worst timing possible, really handicapped this company. 

GE stock may not be headed for the gallows, but that doesn’t mean I want it in my portfolio. 

Breaking Down General Electric

It’s not about where General Electric has been, it’s about where it’s going. While its business has likely bottomed, there are simply too many more attractive areas to invest. 

The most recent Q4 earnings report showed a 16.5% decline in revenue. For FY 2020, revenue fell 16% and orders dropped 20%. Believe me when I say GE will look forward to turning the page to FY 2021. 

General Electric has five business units: power, renewable energy, aviation, healthcare and GE Capital. 

In the most recent quarter, three of GE’s business units were profitable. That’s a big improvement from four out of the five being unprofitable earlier in the year. However, I couldn’t help but focus on healthcare and aviation, the company’s two most important business segments. 

While obviously up versus earlier in the year, Q4 orders and revenue were about in-line with the full-year declines. For GE stock, a recovery in those units will be vital for 2021. While 2021 should be better than 2020, execution in these two arenas is critical. 

Here is the good news, though: GE predicts industrial free cash flow between $2.5 billion and $4.5 billion. That’s great! It really is and cash flow has been a big culprit behind the stock’s underperformance.

At the same time, the company expects earnings of just 15 cents to 25 cents per share. That’s not really something that gets us too excited. At the midpoint, it leaves GE trading at almost 60 times this year’s earnings. 

While it’s not all about the price-to-earnings ratio, I don’t know that we could make a real argument about an attractive valuation across multiple metrics. On top of that, the essentially non-existent dividend doesn’t add to the bull case. 

A Look at GE Stock

Daily chart of GE stock
Click to Enlarge
Source: Chart courtesy of TrendSpider

When the company reported earnings in late January, shares initially popped to the highest level since late February 2020. Keep in mind, the stock still has not cleared its prior 2020 high, something the broader markets did several quarters ago. 

Anyway, the stock popped to multi-month highs before fading almost instantly. Shares are now consolidating in a sideways manner. For investors, that’s not bad news – it’s certainly better than a massive decline. 

In fact, it may even set up a larger move to the upside. If we get it, longs should consider taking profits into the move. 

The rally to $12.23 all but filled the gap from February. Should GE stock clear this post-earnings high, maybe a move into the $13s is possible. At $13.25 is the 2020 high. If we get it, investors may consider taking any profits they have in GE and rolling it into a business with better fundamentals. 

I’m not here to drop bearish heat all over GE stock. The company may have very well seen the worst of its situation in 2020. But just because a company has made it through the worst of something, doesn’t mean its best days are ahead. 

In the case of GE, its best days are likely long in the rearview mirror. Despite the forecasts for earnings growth, analysts expect less than 2% revenue growth this year. 

I hope GE can become the industrial giant it once was. But given how many battles it has left to fight, I believe there are better opportunities out there. 

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

Matthew McCall left Wall Street to actually help investors – by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.

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