Stephen Tusa, the JPMorgan analyst who pegged General Electric (NYSE:GE) long before anyone else, just downgraded GE stock to underweight from neutral. He also dropped his 12-month price target by a buck to $5.
The Monday news sent GE stock down 5.1% by the end of the day. As I write this, it’s down another 3% to $9.20, perilously close to slipping under $9.
Not by a longshot.
When Tusa Speaks, You Ought to Listen
It’s not very often that an analyst will stick his neck out and go against the grain, but that’s what Tusa did in May 2016, long before GE’s troubles started to surface.
Tusa resumed coverage of GE by sticking it with an “underweight” rating, suggesting that the rest of the analysts covering its stock were overly optimistic about the company’s cash flow situation. Tusa warned a dividend cut was likely.
General Electric made its first cut in November 2017, dropping it 50% from 24 cents to 12 cents. A year later, new CEO Larry Culp cut the dividend from 12 cents to a single penny. From the time GE made the first cut to the announcement of the second dividend cut, GE stock lost 66% of its value.
Sure, it now trades 32% higher than last December, but it appears as though that’s turning out to be an extended dead-cat bounce.
The fact that Tusa hasn’t turned bullish should worry the average investor. It suggests that GE’s nowhere near being clear of its problems.
Cramer Chimes In on GE Stock
In November, CNBC’s Jim Cramer was highly complimentary of the analyst’s call.
Cramer, if you don’t know, was bullish on GE stock for a better part of a decade. He finally came around at the end of 2017, admitting he was wrong about the company and was sorry he might have cost viewers money.
“They nailed this story every step of the way, even when the company itself seemed to be totally clueless — or perhaps something even worse — about its own prospects,” Cramer said about Tusa on Nov. 18 on CNBC’s Mad Money. “Which is why you do need to take your cue from these two gentlemen and wait until the real problems they say are solved before you get bullish. And they sure aren’t there yet.”
The second person Cramer’s referring to is Deutsche Bank analyst John Inch, who jumped off the GE wagon a year after Tusa.
So, if you read any comments from either of these guys, you might want to think twice before buying on the dip.
Tusa’s Latest Observations
Tusa believes that the overly optimistic cash flow projections by analysts for the company combined with the fact it has net debt of $77 billion, almost the entire GE market cap, leaves it with no wiggle room in the event of a recession.
“The driver of the downgrade is our view that the Street is significantly over projecting the bounce in FCF in the coming years, off levels that we calculate at zero currently, as Power/Renewables remains weak, GECS (GE Capital Services) will likely consume material cash for the foreseeable future, Aviation fundamentals, as per underlying FCF, are weaker than meet the eye, while lingering sector high leverage including entitlements leaves the company vulnerable to liquidity issues in the event of a recession, for which a potentially dilutive sale of the rest of Healthcare may be needed,” Tusa wrote in a note to clients.
Look, I missed the GE call myself. Well, sort of.
In January 2018, I called GE one of the 10 stocks that could surprise in 2018. Of course, that didn’t happen. It ended up being one of my worst stock picks of the year.
As much as I couldn’t stand the company, I speculated that good things had to happen to its stock after such a huge slide. It didn’t. Now that I read Tusa’s latest comments, I won’t make the same mistake twice.
You Should Definitely NOT Buy GE Stock on the Dip
As I always like to say, you’ve always got options when it comes to buying stocks. You don’t have to buy GE stock at any price.
Think of Warren Buffett’s punchcard analogy where you can only buy 20 stocks for your entire life. Would you buy General Electric?
Would you even consider it?
I didn’t think so.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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