Like the phoenix rising from the ashes, General Electric (NYSE:GE) quickly transitioned from an inevitable date with the doldrums to one of the more compelling turnaround stories – at least from a technical market perspective. Since the last closing price of August 2019, GE stock has catapulted more than 56%.
But General Electric is also a classic case of not getting too emotionally vested with your portfolio. At the end of the day, you want to think of GE stock as just a number, albeit a very positive one. But the idea that this momentum will carry forward is incredibly strained due to the lack of fiscal stability.
Don’t misread this: I’m happy for speculators that made either the right call or experienced a fortuitous lift. However, we’re rapidly transitioning toward a new stage in our economy – what I’ve often called the Roaring 2020s. While General Electric offers some relevant businesses, legacy issues weigh down the company as a whole.
Therefore, GE stock is a perfect candidate to sell into strength. Here are three reasons why.
Larry Culp “Saved” GE Stock
Sometimes, Super Bowls disappoint. The last one certainly did not.
Going into halftime, the Kansas City Chiefs and the San Francisco 49ers were tied 10-10. Seemingly, nothing separated the two. However, the game opened up when the Niners converted the Chiefs’ mistakes into turnovers.
With the clock winding down the third quarter, it seemed the 49ers had it in the bag. Of course, that was not to be.
I fear we are facing a similar situation with GE stock. John Inch, senior analyst at Gordon Haskett Research Advisors, made a bold statement, declaring that General Electric CEO Larry Culp “saved the company.”
I don’t necessarily disagree. As CNN Business journalist Matt Egan described it, Culp “moved swiftly to raise cash by selling everything not nailed down” and cut the dividend down to its bare bones. These and other actions helped restore confidence in the beleaguered industrial giant, sparking a revival in GE stock.
So yes, Culp saved GE, but what exactly does that mean?
In the immediate sense, shares are not going to zero. Thus, stakeholders are still in the game. But as the last Super Bowl proved, your offense still has to put up more points than the other team.
And that segues into my next point.
General Electric Has Little Firepower
With Culp taking a chainsaw to underperforming business units, theoretically, GE stock should be leaner and meaner. It is, but on a relative basis. In reality, the company needs to do much more than just save itself from disaster: it must now convince investors today that they’re worth gambling on.
As you might guess, I have my doubts. For instance, General Electric has a viable, relevant business with its aviation division. However, Boeing’s (NYSE:BA) crisis with its 737 Max jetliner has dampened GE’s star unit at a time when it can’t afford it.
Through a joint venture with France’s Safran (OTCMKTS:SAFRY), General Electric supplies engines for the 737 Max. With Boeing’s production halt and news that it doesn’t anticipate the Max to return to service until at least this summer, it’s a huge blow to GE.
Furthermore, there’s the nasty issue of the coronavirus. In just a matter of weeks, the virus has infected 40,500 people and killed at least 910. Historically, the markets have responded well to such humanitarian crises. But the outbreak has disproportionately impacted certain organizations over others. Sadly, General Electric is one of them.
According to the Washington Post’s David J. Lynch, GE “relies on its Chinese factories for parts to produce CT scanners, ultrasound and X-ray machines, oil field pumps, valves and motors, and aircraft engine components.”
Again, it’s another distraction that GE stock doesn’t need.
Risk-Reward Picture No Longer Makes Sense
Betting on General Electric when its shares hit multi-year lows was the easy trade. With much negativity baked in, speculators could reasonably rely on the cyclical nature of the markets.
As well, you had investors eagerly watching over Culp’s actions. With new leadership at the helm, there was the possibility of at least plugging some holes. In other words, risk-tolerant traders advantaged the low-hanging fruit.
Now that this fruit is gone, I’m not excited about GE stock. That’s not to say that I’m outright bearish on the company. However, the risk-reward picture doesn’t make as much sense today.
Essentially, Culp has cut what he had to. But everyone knows that you can’t cut your way to growth. This is where the challenge comes into play. The defense has got the ball back for you. But if your team has a weak offensive line and a gimpy quarterback, a recovered turnover doesn’t mean much.
Put it differently, this isn’t so much about hating on GE stock. It’s more about being smart with your money.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.