It’s been almost two weeks since General Electric (NYSE:GE) announced its Q2 earnings. Although they were slightly better than expected, General Electric stock has dropped meaningfully since its results were unveiled.
Before you buy GE stock, you might want to consider that the biggest GE stock bear — Stephen Tusa of JPMorgan, who was bearish on General Electric stock way back in April 2013 — continues to be unimpressed by CEO Larry Culp’s turnaround plan.
Investors don’t seem too impressed with Culp’s plan, either.
Since Culp’s taken the top job at GE in October 2018, the GE stock price is down about 25%.
Despite the warnings of JPMorgan’s Tusa, the longtime General Electric stock bear, some investors might think they should be greedy when others are fearful when it comes to GE stock.
But that would be a mistake.
GE isn’t the company it once was, Tusa is not the only analyst who’s skeptical about Culp’s ability to turn the company around. Moreover, there are better stocks with share prices under $10 and there are better names with market caps of around $80 billion.
There are many reasons why investors might want to think twice about General Electric stock. Here are three of them
The Bear’s Not Biting
Even though GE beat analysts’ estimates and the company raised its full-year outlook, Tusa suggested that weakness at its Power and Renewables businesses made General Electric stock undesirable.
“The quarter was a miss operationally, with the combined Power/Renewables segments worse (despite no H-class turbine deliveries which is accretive), offset by modest upside at Healthcare and a material miss at Aviation, the key value driver,” Tusa stated in his a July 31 note to his clients.
“The stock is up on the headlines, as it has been many times before, but, like in the past, the underlying core fundamentals are actually a bit worse, and we remain underweight on this basis and would be selling into any strength,” the analyst added.
Tusa has a $5 price target on General Electric stock at the moment. To make things worse, GE stock price breached its 200-day moving average on Aug. 9 for the first time since early June.
Nine analysts have a “buy” rating on GE, nine have a “hold” rating and two have a “sell” rating. As for their target prices, the high is $21, and the average is $11.83.
If GE stock price rebounds to the average target, it will have generated a return of nearly 25%.
That’s tempting, but I wouldn’t bet against Tusa at this point.
Better Choices Than General Electric Stock
There aren’t a lot of large-cap stocks, other than financials, with share prices of less than $10.
As for large-cap stocks with market caps of around $80 billion, investors could put together a diversified, 20-company portfolio of similarly valued stocks that could do better than GE stock over the long haul.
As I stated in July, the gains GE has made in 2019 — it’s up 23.3% including dividends, through August 9 — are profits that should be taken.
“While it might regain positive free cash flow by 2020, its earning power won’t be nearly as robust as it once was. As recently as 2014, GE had almost $21 billion of free cash flow. After selling so many divisions to tidy up its balance sheet, it’s lost the ability to generate significant cash flow,” I wrote in a column published on July 12.
“Analysts like Stephen Tusa see that as a big problem. I would tend to agree with them.” I added.
At the end of the day, Larry Culp won’t be able to return GE to its glory years. He might be able to build a reasonably sound business in three to five years, but he’s never going to make it a $300 billion market cap giant like it was before the last major recession in 2008.
Investors shouldn’t buy General Electric stock until Stephen Tusa changes his stripes and becomes a GE stock bull.
But you’ve probably got a better shot at winning the lottery. Once analysts are bears, they usually stay bearish.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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