General Electric (NYSE:GE) is one of America’s oldest and best-known companies. As one of the original 12 members of the Dow Jones Industrial Average, General Electric stock was viewed by generations of Americans as a solid investment.
However, the company has grown in complexity and is involved in a lot more than power and lighting these days, as investors know all too well. A whistleblower report alleging accounting fraud at GE in general, and in particular in the company’s long-term care insurance unit, resulted in an 11% one-day crash by General Electric stock on Aug. 15.
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There’s been a tentative recovery in the GE stock price since it tanked on Aug. 15. General Electric stock is now up 20% in 2019, although it has given up the gains it made from January through August. With its new CEO approaching his first-year anniversary at the helm and after reporting better than expected Q2 earnings and guidance, is GE worth a look? Or does the current risks facing General Electric stock outweigh any potential gains?
The Next Enron?
Up until mid-August, GE was having a pretty good year; or, at least General Electric stock was doing well for investors. There were a few rocky periods, but by the end of July, GE stock price was sitting at $10.45 which represented a 38% gain on the year. However, just two weeks later, a shocking report torpedoed GE stock and raised serious questions about the company’s future.
On August 15, Madoff whistleblower Harry Markopolos, an accountant, released a 175-page report detailing alleged fraud at General Electric, going back decades. Markopolos claims that after more than a year of investigation, he uncovered $38 billion of accounting fraud at GE, including an alleged cover-up of massive losses in the company’s long-term care insurance unit (GE had to boost that unit’s reserve funds by $15 billion last year). Markopolos launched the GEFraud website to host the report and provide details on what he describes as “a bigger fraud than Enron.”
Markopolos pulled no punches when he told CNBC: “It’s going to make this company probably file for bankruptcy”
The market’s reaction to the blockbuster report was swift. General Electric stock plunged 11% in its biggest one-day drop in a decade.
Can Larry Culp Turn Around General Electric Stock?
Larry Culp took the reins as GE’s 12th CEO last October. There were high hopes for his tenure. Holding a Harvard MBA, Culp became the first outsider to run GE. He made a name for himself by boosting Danaher’s (NYSE:DHR) top line from $4 billion to $20 billion during his 14 years as its CEO. Despite initial hopes that he could “fix” GE, investors’ confidence in its turnaround has waned. General Electric stock dropped from $12.69 in the days after his run at CEO began to as low as $6.71 in December, before staging a partial recovery over the summer.
Less than a year into his tenure, the jury is out on whether Culp will be able to return General Electric to its former glory. However, he has received praise for his reaction to the whistleblower report. Culp went on the attack, calling the report “market manipulation” that contains false statements. In addition, Culp put his money where his mouth is, buying nearly $2 million worth of GE stock immediately after the report went public.
The Bottom Line on GE Stock
Should investors buy General Electric stock? Even after crawling out of the hole created by the Markopolos report, the current GE stock price remains well below its 2019 highs. The shares are off nearly 70% from their fall 2016 levels. Morgan Stanley recently put a $10 price target on GE stock, but remains cautious. InvestorPlace contributor Tom Taulli recommends that investors hold off on adding General Electric to their portfolios, noting the company’s high debt load, the risk of slowing global economic growth and the challenge that CEO Larry Culp faces in turning around a company as big and complex as GE. In other words, at this point, the risks facing GE stock probably outweigh its potential rewards.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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