General Electric (NYSE:GE) is a fallen angel — and the trip down has lasted decades. Very few investors make bullish arguments for its recovery. In August, I wrote about investing in GE stock because it was still under the radar. Then last week, Goldman Sachs outed my thesis as a great idea for next year. Both our calls had similar logic and I am glad that I beat them to it.
GE stock has delivered green since my write-up, but my calendar on it is ultimately even longer term. It is not too late to act — every portfolio needs a position like this. America will emerge strong out of this Covid-19 mess, and GE will be a leader in the efforts.
I mainly wanted to bet on a great American company that is a sleeping giant. It gets no respect on Wall Street. The younger crowd wants EV SPACs and cloud stocks. Meanwhile, this behemoth cranks out almost $100 billion in sales and a ton of free cash flow. The bid for new tech is insatiable and not many are looking at the boring old dogs.
Being in the Right Places Matters a Lot
In reality — almost in secret — the company is now set to capitalize on the current winning themes. Power and renewable energy are all the rage these days.
If indeed the electric vehicle is going to replace the internal combustion engines, these two segments are golden opportunities. Environmental, Social and Governance (ESG) investing is pushing the world in that direction, so GE will have upside from those efforts. Then there is healthcare, and the virus scare further highlights the importance of that sector. Clearly there is a lot of work there, and that too is upside potential.
But the biggest incremental benefit will likely come from its aviation division. Right now the airline industries are struggling to stay alive. Once the worst is over for them, GE stock will see additional bids from there.
GE Stock Has Limited Downside Risk
At under $7 per share, GE stock carries limited downside risk. Usually pitfalls for stocks come from two angles. There are the extrinsic factors like a market-wide correction from a virus. Then there are the intrinsic reasons — and GE has had its fill of them.
While that was bad to wade through, all the stones have been turned. I doubt that there are new issues that we don’t know about yet. Management issues plagued it for a long while, but this team is showing reliability.
They are executing on plans by reducing debt and streamlining their businesses. This way they can continue on with repairing the damages from their predecessors.
Those who already own the stock have suffered tremendous pain for 20 years. GE stock is almost 90% below the dot-com bubble and it wasn’t even a frothy tech stock then. The road back to redemption is not a sharp spike, it’s a long slog.
Soon Investors Will Find Out if the Worst Is Really Over
It took it this long to shed all the fat from the stock. Down here it’s bare bones and near lows not seen since the 2008 crisis. They might as well be all-time lows. This makes it logical that the upside potential should be larger than the downside risk.
Soon enough, management will report earnings. This should be a difficult quarter given the macro-economic conditions, but any upside surprise could launch it into a nice rally to $9 per share. There are plenty of resistance lines in the way, but the bar is pretty darn low at this point.
For investors who are nervous about the next few months, buying insurance in the form of a boring stock like this is cheap.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.