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GE Stock Gains on Speculation of Warren Buffett Investment

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General Electric Company’s GE shares gained more than 5% in intraday trading yesterday, recording its biggest one-day gain since April 2015, before closing at $13.44 for a 4.3% jump. This followed a dismal trading session on Monday when the shares plummeted to $12.86 — the lowest since July 2009.

By and large, investors were accustomed to bearish reports on GE due to continuous lackluster performance in the recent quarters amid portfolio restructuring initiatives along with a top management overhaul.

So what suddenly drove the positive share price movement?

Speculations are rife that Warren Buffett, the famed investor and the chairman and CEO of Berkshire Hathaway Inc. BRK.B, is likely to invest in GE, aiming to capitalize on the undervalued stocks. The rumors created an unlikely rally for GE shares as investors probably believed in Buffett’s wisdom and decided to join the bandwagon. Like Buffett, investors too expected to gain from a stock that seemed to have long-term potential despite losing more than half its market value last year.

GE shares might have also benefited from an overall comeback in Wall Street sentiments as fears of an escalated trade war were allayed. The murky trade war resulting from tariffs and counter tariffs imposed by the United States and China could have overtly hurt exporting firms like GE. As the tensions gradually eased, the market rallied, benefiting stocks like GE, which recorded the biggest percentage gain among components of the Dow Jones Industrial Average.

Despite the euphoria, shares of GE have underperformed the industry, with an average loss of 54.7% in a year compared with a decline of 14.2% for the latter. In order to boost the company’s sagging shares, CEO John Flannery had earlier decided to focus on three core businesses: Aviation, Healthcare and Power. However, the company is now contemplating to spin-off its core operations to maximize shareholder returns after taking a hit of $6.2 billion in the fourth quarter from the legacy insurance business. This could result in further fluctuations in share price as the market awaits clarifications.



Significant order backlog, high operating risks related to the Brexit referendum and foreign currency woes remain other headwinds. GE Power has been the biggest drag on margins due to lower demand of turbines. The company aims to improve its profitability by reducing overhead costs by $2 billion in 2018, majority of which is likely to come from the beleaguered power segment that sells electrical generation equipment. GE further intends to sell assets worth $20 billion to improve liquidity.

Flannery has termed 2018 as a reset year and expects the company to stage a turnaround to reward its shareholders with risk-adjusted returns. Critics, however, have widely raised concerns about the efficacy of such steps.

GE has a Zacks Rank #4 (Sell). Better-ranked stocks in the industry include Federal Signal Corporation FSS and Crane Co. CR, each carrying Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Federal Signal beat earnings estimates in each of the trailing four quarters with an average positive surprise of 16.5%.

Crane has a long-term earnings growth expectation of 10.4%. It has beaten earnings estimates in each of the trailing four quarters with an average positive surprise of 2.6%.

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General Electric Company (GE) : Free Stock Analysis Report
 
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