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No Need to Rush Into General Electric Company Stock

Bret Kenwell

Shares of General Electric Company (NYSE:GE) had a horrendous 2017. After a troubling run through the first 10 months of the year, the company announced in November that it would halve its dividend and look for ways to turn the company around. All said, General Electric stock fell 45% last year.

However, shares have been rallying hard in 2018. At the start of the year, GE was hovering near its 52-week low of $17.25. Quickly though, it’s found itself higher by $2 per share or more than 11%. It’s got many investors thinking that they missed the bottom in General Electric stock.

Did We Miss Our Chance to Buy GE?

I don’t think we’ve missed our chance to buy GE stock.

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First, it’s worth pointing out that companies like Honeywell International Inc. (NYSE:HON), Boeing Co (NYSE:BA) and United Technologies Corporation (NYSE:UTX) are crushing GE stock over the last few months and quarters. So if investors are bullish on the aerospace industry or industrial sector in general, they have surely been better off sticking with these stocks over GE.

While these stocks continue to do well, there’s no denying GE’s surge this year. But let’s keep things in perspective. Oil has been rallying, which is now one of the few bright spots for General Electric. Further, both the S&P 500 and Dow Jones Industrial Average have been running higher. Both indices are up more than 3% to start the year, and we haven’t even had 10 trading sessions yet.

I won’t attempt to call a top — however temporary it may be — but most stocks have been hot to start the year. It’s only realistic that they cool off a bit.

But the biggest reason I feel like we haven’t missed GE? The fundamentals haven’t improved.

In November, most analysts were looking for a dividend cut of 25% to 40%, so a 50% cut was a bit unexpected. So were the expectations management put out. As a result, General Electric stock didn’t rally on this bad news. If it had, that would indicate that the market was too pessimistic, and the new scenario is now better than expected.

Unfortunately, it was worse than expected. Analysts are forecasting sales to grow just 0.4% this year and just 1.3% in 2018. Earnings are forecast to fall 28% this year and another 4% in 2018. Margins will take a big hit.

Where to From Here?

Despite the lofty fall in the stock price, the valuation isn’t all that attractive. GE stock still trades with a price-to-earnings (P/E) ratio of 24 and a forward P/E ratio of 18.7. One would think after the massive stock decline, GE would have a dirt-cheap valuation. That’s not the case, as expectations have also come down with the stock price.

A would-be ~5% dividend yield would make investors feel better about the lackluster situation. But since it was cut in half, GE stock yields just 2.6%.

Without a hefty dividend or low valuation and with two straight years of declining earnings on essentially flat sales growth, why go all-in on GE stock? There’s not a big reason to jump in now, and I think we could get a better chance at some point in the future. It’s true, investors are forward looking. But generally not for a entire year or more ahead of time.

JPMorgan’s Stephen Tusa has been spot-on in calling GE’s decline. Just a few days ago on Jan. 9, he cut his price target on GE stock to $16 from $17. He argues that the company could very well earn $1 in earnings per share this year (consensus calls for $1.07). However, it would be the “lowest quality” of earnings in the sector.

Not exactly a ringing endorsement.

Trading General Electric Stock

While the fundamentals are weak, the technicals actually look better. GE’s move over the 21-day moving average and 50-day moving average is positive. In fact, the 21-day is now trending higher as well. This intermediate-term trend is good news.

chart of GE stock price

Click to Enlarge

However, I would expect General Electric stock to run into resistance between $19.50 and $20 (blue box). This former level of support could very well act as resistance until the story starts to improve for GE. Further, the MACD on the bottom of the chart could run into some resistance (purple line).

Should that be the case, GE stock will likely consolidate or turn lower. Unfortunately for bulls, that could be a pretty big move down even it doesn’t make new lows. For now, I remain on the sidelines in General Electric stock.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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