After a tough 2020, General Electric (NYSE:GE) stock has bounced back in a big way. A few weeks back, shares returned to price levels last seen at the onset of the coronavirus pandemic. Results have improved, and investors have grown in their optimism about a recovery. But, at around $13 per share, this isn’t a great buying opportunity.
Why? The floundering industrial conglomerate may be in a better position now than it was six months ago. Yet, the issues that plagued the company, and its disparate business units, are still hanging over it.
Even before the pandemic, the company’s flagship aviation division was facing headwinds. The unwinding of GE Capital was another issue as well. Its less challenged units weren’t exactly setting the world on fire, either. There wasn’t much of opportunity then, and it’s not much of one now.
Sure, perhaps at single-digit prices, value could be its own catalyst. That is to say, shares were so oversold, minimal improvement could move the stock. But, at today’s prices? It’s too late. Today’s share price more than captures its improvement prospects not only for this year, but for next year as well.
The situation’s slightly changed. But, my view on the stock stays the same. If you own it, sell as soon as possible.
GE Stock Price Already Factors in the Rebound
Clearly, the situation has improved, not worsened, for General Electric in recent months. As I recently wrote, profitability has improved dramatically in its most recent quarter. The company is also set to see its Industrial unit’s free cash flow rise this year as well.
Recent news of the company’s merger of its aircraft leasing unit with a rival lessor, in a $30 billion transaction, is yet another step in the right direction. Not only because the deal provides GE with a $26 billion cash infusion. It also removes $30 billion in debt. Combined with other debt reduction efforts, post-divestiture, the company will have whittled down its net debt from $80 billion to $45 billion. Further moves will lower this another $15 billion, to $30 billion, by 2023.
In short, good news for the company. But, these developments are already factored into the stock price. And then some. Investors who bought-in when the situation looked the most bleak (last spring, when shares briefly traded for less than $6 per share) took a risk, and reaped the benefit, as sentiment shifted from negative back to positive.
But now, that opportunity is long gone. Instead of oversold on pessimism, GE stock today is overbought on unsustainable optimism. The situation may have improved. Yet, results in the coming quarters could underwhelm. If this happens, expect shares to pull back below $10 per share.
Why Shares Could Pull Back Following the Recent Surge
The U.S. and other developed economies may be entering “recovery mode” with regards to Covid-19. But, General Electric still has plenty of work cut out for it. With the airlines slowly trying to get “back to normal,” expect GE’s Aviation unit to experience further challenges.
How about the other business units? Based upon the company’s 2021 outlook, the situation is lukewarm at best. Organic revenue growth is set to be in the low-single digits for its Industrial and Healthcare units. The continued pivot toward a “green economy” likely bodes well for the Renewable Energy unit. But, outlook calls for just mid-single digit organic revenue growth.
As for GE Capital? The unwinding has mostly wrapped up, thanks to the aircraft leasing divestiture. Once that deal closes, all that remains from this moribund business unit is the company’s legacy insurance liabilities, and its turbine equipment leasing operations.
In short, the company is in an improved place today versus one year ago. But, it’s hardly cause for celebration. As seen from the upward move of GE stock over the past six months, investors haven’t realized yet their enthusiasm is a bit overdone. This is bad news, as its lukewarm outlook translates into underwhelming quarterly results.
Bottom Line: As Runway Runs Out, Sell Into Strength
Admittedly, there were enough improvements in recent months to justify a rebound in General Electric’s stock price. But, not to the extent we’ve seen (70% surge in the past six months). Given it now trades at 53x estimated 2021 earnings (24 cents per share), and 24.5x estimated 2022 earnings (53 cents per share), investors are ignoring near-term headwinds, and assuming that a further recovery over the next 18 months will go off without a hitch.
Putting it simply, a full recovery is already factored in as a certainty. That leaves little room for additional gains. With more in play to sink GE stock back to prior price levels, than send it further upwards, what’s the best move? Sell into strength (while it lasts).
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.
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