General Electric (NASDAQ:GE) has been on a bumpy ride over the past week. Last Thursday, the company’s shares had their worst day since the 2008 financial crisis hit. General Electric stock fell 11% after forensic accountant Harry Markopolos released a 175-page report accusing the company of accounting fraud.
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However, on Friday, GE stock rebounded slightly after management defended its accounting practices in a series of statements. Plus, CEO Larry Culp bought $2 million of the equity. This action went a long way to soothe investors that were rattled by the allegations.
But this is just the latest in a series of missteps that has impacted the GE stock price. The hype over the Markopolos report may pass. However, the company still has serious problems it needs to address going forward.
Details on the Report from Markopolos
Harry Markopolos is best-known for accurately spotting the Bernie Madoff Ponzi scheme. In his report, Markopolos said General Electric is hiding serious financial problems that will cause it to go bankrupt.
Specifically, GE understated liabilities in its insurance business and misrepresented its financial dealings. Its accounting fraud is “bigger than Enron and WorldCom combined.”
If it sounds sensational and over the top, that’s because it is. The Markopolos report is short on any real evidence and full of inaccuracies. Analysts from Goldman Sachs, Citigroup, and William Blair have all criticized the report.
Plus, Markopolos is part of a hedge fund that stands to benefit financially from a declining GE stock price. This immediately hinders his credibility. But regardless of what happens with the report, it seems unlikely that General Electric stock is turning around anytime soon.
Reasons to Hold Off on General Electric Stock
In spite of the company’s restructuring efforts, General Electric stock is down nearly 30% from a year earlier. It’s also down 85% from its all-time high in 2001. One of the biggest problems GE needs to contend with is its heavy debt load.
The company is carrying more than $100 billion in debt and is running out of ways to reduce this figure. It already sold off its energy services, part of its healthcare business, and other assets. Not to mention, the company hasn’t earned any net income over the past couple years. Further, its free cash flow has been negative for a long time now.
A number of analysts have defended the company, and many point to their faith in CEO Larry Culp as the reason why. And it’s true that Culp has done a lot to turn General Electric around. But these problems are bigger than any one CEO.
The company may not be guilty of fraud. But right now, it isn’t worth investing in either. If a General Electric turnaround is ever going to happen, it’s going to take a long time. And the company’s shareholders will be negatively affected in the meantime.
As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.
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