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Nothing About the Breakup Improves General Electric Company Stock

After a century of being dormant, professional baseball appears open to the concept of two-way players. And that’s exactly how I view General Electric Company (NYSE:GE), as a two-way investment. In recent years, GE stock has provided ample profits for both bulls and bears. The difficulty, of course, is determining which side will show up.

When I took my first crack at analyzing GE stock, I was bullish. I felt that in a business world of specialization, having a centralized, all-in-one platform had its unique advantages. Plus, the company was established in the late 19th century. General Electric is an American icon that has survived world wars, great depressions and perhaps President Trump.

The problem was, General Electric was too convoluted even for itself. After years of frustrating, sideways consolidation, GE stock showed fissures. Clearly, investors were losing confidence with an organization which I initially felt was unique, but most deemed dangerously irrelevant.

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I saw the writing on the wall, and I reversed course. I’m glad I did, ultimately warning investors from a horrific implosion.

But as some of you might know, I reversed my reversal this year. In March, I stated that GE stock has potential for the gambler. A month later, I doubled down on my speculative bullishness. In between my two articles, our own Vince Martin acknowledged the wild bull case, but he still felt apprehensive.

So far, the bold enjoy their spoils. As another one of my InvestorPlace colleagues, Dana Blankenhorn mentioned, General Electric has a new path forward. After years of delaying the inevitable, the jack-of-all-trades company is finally breaking up.

But is this really the answer to its problems, or can the bears once again lick their chops?

GE Still Is GE

At first glance, many investors find encouragement at management’s substantive step towards recovery. Far from the usual hype that executives in similar situations resort to, a breakup offers reasonable optimism.

That said, the steps are slow and measured. Blankenhorn writes:

But because GE is in the straits it’s in, this must be done in a GE way. This started May 21 with news it would be merging its train engine business with Wabtec Corporation (NYSE:WAB), a $20 billion deal giving GE 50.1% of the merged entity and $2.9 billion in cash.

The idea here is to replicate General Electric’s success with its oil and gas division, which management combined with Baker Hughes. The new entity, Baker Hughes, a GE Co (NYSE:BHGE), is up 16% year-to-date, thanks to an improved energy market, and fracking demand.

I caution investors, though, who are conflating past success with future probabilities. Until electric vehicles take over the entire transportation landscape, oil and gas have a bright future. Locomotives? Meh, not so much. Plus, we’re not even talking sexy, high-speed trains, but largely, freight cars.

On top of all this, Martin discussed the risks involved in a breakup months before General Electric pulled the trigger. He pointed out tax liabilities that could come back and haunt GE stock. Also, management must deal with several liabilities related to its long-term debt and pension obligations. Thus, a dividend cut isn’t out of the question, which would hurt shares.

Finally, Martin asserts that GE must be careful spinning off or selling too many assets. It still must grow in an intensely competitive environment. Doing so without key assets is an extraordinary challenge, to say the least.

Remain Cautious but Optimistic Towards GE Stock

In spite of all the warnings, if you still want to speculate on GE stock, I believe you have some wiggle room remaining.

Let me just first state that General Electric is by no means a long-term investment opportunity. You may have to dump this company like last month’s newspaper if things go awry.

But right now, GE isn’t trading on the fundamentals, but rather, on psychological hype. The speculators that are currently buying into the recovery story are doing so because of the low-standard effect. It’s good enough that management is doing something, so shares will rise.

I’ll repeat, if you’re going to take this risk, stay close to the sell button. At some point, the fundamentals will catch up. When they do, management’s plan either demonstrates realistic and rational optimism, or it doesn’t. If the latter, it’s going to be the summer of ’17 all over again.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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The post Nothing About the Breakup Improves General Electric Company Stock appeared first on InvestorPlace.

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