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Should You Buy General Electric Stock at Historic Lows? Not So Fast

Alex Sirois

In the Covid-19 pandemic while people are locked inside, many pundits push the narrative that a great number of airline, cruise line, and oil and energy stocks are on a clear path toward filing for bankruptcy. And one stock that a lot of people are looking at now is General Electric (NYSE:GE).

Should You Buy GE Stock at Historic Lows? Not So Fast

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Of course, travel has cratered during the pandemic. The U.S. Travel Association estimates that this could equate to $910 billion in losses to the travel industry and potentially cost 4.6 million Americans their jobs.

Most planes are grounded, cruise ships are anchored in ports, people aren’t moving around, and the oil that turns the gears of the U.S. economy isn’t being burned.

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But all of this doesn’t mean that every airline, travel company, and oil stock is doomed. Likewise, significant exposure in the aforementioned industries does not indicate certain bankruptcy.

GE Stock Is Worth a Look

If we look at GE from the perspective of its performance of late, and balance that with expectations post-Covid-19 there is a cautious case for adding GE to your portfolio.

Before the world got turned upside down, GE was making a steady comeback based on sound management principles. In late 2018 CEO Larry Culp took over at GE. He and his management team sold off many underperforming assets to pay down debt, beat predicted earnings per share quarter after quarter, and focused on shrinking GE into a leaner, more efficient, profitable company. GE was going in the right direction.

GE was doing what all of the analysts believed they should have been doing; selling off weaker businesses, paying down debt to strengthen their leverage situation, and shedding inefficient legacy units from its business.

The net effect was a good 2019. It translated to General Electric’s stock rising.

GE Fundamentals Told a Good Story

In the first quarter of 2019, GE beat the consensus earnings per-share estimate of 9 cents by 3 cents, and, in Q2 and Q3, GE beat EPS estimates again, this time by 4 cents each quarter, and then they finished 2019 with another earnings beat of 3 cents. That’s very solid. And if investors solely consider GE’s EPS performance, it’s tempting to label General Electric a strong buy.

During 2019, GE was a strong stock and provided a strong return. Many market analysts attributed this to CEO Larry Culp and the strategic direction in which he had been taking GE. And that was with the grounding of the Boeing (NYSE:BA) 737 planes that utilized GE’s LEAP engines.

And while GE’s 2019 was laudable, investors looking to buy GE now need to weigh several important factors.

But GE Has Problems that Can’t Be Fixed Overnight

As it stands right now, the business comprises Power, Renewable Energy, Healthcare, Aviation and GE Capital. GE Power has long had problems that GE has been struggling to fix. Renewable Energy spent a lot of cash in 2019, and like many players in that sector, struggles to fulfill the promise of profitable green energy.

Of the other 3 units; Aviation, Healthcare and GE Capital, it’s likely that only Healthcare will emerge stronger in the wake of the pandemic. It has been working non-stop producing ventilators and there should be demand for other high-value products from the division in the near term. It seems robust. Aviation and GE Capital on the other hand, face serious current and longer-term issues.

Combine the 737 groundings of 2019 with the disaster that has occurred in travel in 2020 and it’s clear that GE Aviation has lean days — and lean years — ahead. None of this is a boon to the stock price.

GE Capital already had pension problems to deal with prior to the problems travel shuttering has caused. The unit includes the largest commercial airline financing company in the world, which is bad for its stock since not many companies are looking to finance planes now or any time soon.

All that said, watch for CEO Larry Culp and his management team to tackle these problems head-on. How that plays out will be interesting to watch and will have an effect on GE’s stock price as GE moves forward.

How Can Investors Value General Electric?

Despite the problems that GE’s business units face, management is strong. GE will continue to become leaner.

And at a current price near $6.25/share, the company is garnering serious market interest. Many see this as an inflection point and expect a correction upward. Remember, this does look a bit like Q1 2009 when GE was trading at $6.40 and quickly rose to $10 per share to then finish the year over $14. That was during a crisis. We also saw a price increase from $6.45 a share in mid-December 2018 followed by a sharp rise to over $10 by the following February.

So there is potential to make money off of a market correction, but there is also significant volatility and risk. Especially in the short term.

If I had General Electric’s stock currently underwater, I’d hope for a correction so that I might be able to sell it off and break even. Otherwise, if you’re long-term bullish on GE, now may be the time to load up as the stock is at historic lows, considering its stock price eclipsed $30 back in 2016.

For everyone else, there’s many other opportunities to buy cheap stocks that don’t have GE’s problems and have greater upside.

As of this writing, Alex Sirois did not hold a position in any of the aforementioned securities. 

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