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When It Comes to General Electric Stock, Patience Will Be Rewarded

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It’s official. Much-maligned General Electric (NYSE:GE) stock is the most heavily traded stock in the market.

According to Bloomberg, the average trading volume on GE stock in 2018 is a whopping 80 million shares a day. That is nearly 15% higher than the second-most heavily traded stock, Bank of America (NYSE:BAC). At this rate, it looks like GE is poised to knock off BAC as the most heavily traded stock this year, a title which BAC has held for seven consecutive years.

That may sound like good news for GE stock, but it isn’t. The spike in trading volume is mostly due to the fact that GE stock is a near-$10 stock (low price) that is widely covered and followed by the media, analysts and investors (lots of catalysts). The combination of a low price tag and tons of catalysts makes GE stock a trader’s dream here and now.

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But, GE stock won’t remain a trader’s dream forever. Over the next several years, GE stock will bounce back from these low prices and reemerge as a global industrial leader with a stable stock price above $20.

Will that rebound happen right away? Probably not. The GE turnaround will take a while, and as such, GE stock will take a while to bounce back, too. But make no mistake. When it comes to GE stock, patience will be rewarded.

Here’s a deeper look.

GE Is Making All the Right Moves

The downfall of GE was brought on by mismanagement of an overly complex business with a ton of debt and a significant lack of focus and innovation. But, those errors are now being corrected by new management, which is taking aggressive and bold steps to turn GE around.

Most importantly, the company is simplifying its business model to include only three core components: Aviation, Power and Renewable Energy. Everything else, including Healthcare, will be spun out of the GE umbrella.

The removal of these businesses will allow the company to significantly reduce its debt load, take huge costs out of the operating model, and focus on pushing innovation more quickly through its remaining business segments.

Overall, then, GE is making all the right moves. It is simplifying the business model and reducing leverage. And it is narrowing its focus on three operating segments with long-term, stable growth prospects.

These steps won’t yield immediate benefits. But, over time, revenue growth should stabilize, and margins should head materially higher. Debt reduction should flow into improved profitability through lower borrowing costs. And earnings should bounce back in a big way.

GE Stock Is Simply Too Cheap

At current levels, GE stock isn’t priced for a bounce-back in earnings.

The Aviation business is a $27-billion business which operates at 20% operating margins. The Power business is a $35-billion business which operates at 6% margins. Meanwhile, the Renewables business is a $9-billion business which operates at 6% margins.

If you add up all those segments, total operating profits of the “new GE” are $7.9 billion, according to a recent investor deck. Assuming that those three businesses continue to grow and that interest expense reduction materializes, the consensus Wall Street estimate calling for $1.20 in earnings per share in three years makes sense.

At that time, GE stock should trade at an enhanced multiple due to leverage reduction. The normal forward multiple on GE stock is 16. Assuming an 18X multiple, then you are looking at potential price target for GE stock of $20 in the next one to two years.

Bottom Line on GE Stock

The fall from grace has been an ugly one for GE stock, and calling a bottom has been like trying to catch a falling knife.

But, in the bigger picture, the company is presently making the right moves in order to right the ship. In sum, these steps should drive GE stock above $20 over the next several years.

As of this writing, Luke Lango was long GE.

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