General Electric Company (GE) Stock Could Feel Right to Contrarian Investors

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If I were an investor who bought and sold on how a stock “feels,” I could see why General Electric Company (NYSE:GE) looks like a tempting contrarian play. The optimism toward GE stock that greeted the departure of CEO Jeffrey Immelt already has faded. Investors are writing off a potential turnaround under new CEO John Flannery before it even begins.

General Electric Company (GE) Stock Could Feel Right to Contrarian Investors
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Meanwhile, the shares hit a 21-month low earlier this month. A downgrade from JPMorgan Chase & Co. (NYSE:JPM) pushed the stock to the lows. And it certainly looks like the kind of report that marks “maximum pessimism”.

But I’m simply not buying GE stock — not yet. There is reason for optimism. Immelt needed to move on. In fact, he was #1 on our list of 10 CEOs who needed to follow former Ford Motor Company (NYSE:F) chief Mark Fields out the door. But GE’s problems aren’t all Immelt’s fault and, regardless of the blame, they will likely take years to fix.

Turning Around The GE Battleship

Changing a company as massive as General Electric often is compared to turning around a battleship; It’s a slow, tedious — and occasionally dangerous — process.

There’s an argument relative to GE stock that most of the maneuvers have already been done. For better or for worse, Immelt has largely disposed of the company’s financial services business, which dragged the shares down during the financial crisis. He also left General Electric well-positioned in digital, potentially setting the company up to be a major player in the IoT — Internet of Things — ecosystem.

Now, with the deal creating Baker Hughes, a GE company (NYSE:BHGE) closing recently, GE has become  a major player in oilfield services.

But significant questions remain about General Electric. The JP Morgan report included significant questions about the company’s culture, particularly at the management levels. GE has been late in emerging markets and it is increasing exposure to the U.S. shale industry at a potentially dangerous time.

 

There still isn’t an overarching strategy for GE as a whole to be more than the sum of its various parts. And for a company this large, turnarounds aren’t just a matter of reorganizing units or buying and selling businesses.

General Electric reminds me of Procter & Gamble Co (NYSE:PG), a similarly sized (though obviously differently focused) conglomerate. P&G’s turnaround efforts go back to the beginning of the decade, when the company announced significant cost cuts.

P&G also has divested brands (including a major sale of its beauty brands to Coty Inc (NYSE:COTY)) and tried to re-focus. But PG stock has gone nowhere for almost three years. A similar fate could be in store for GE stock.

Getting Paid To Wait For GE Stock

Candidly, that might not be a terrible outcome for share holders. GE stock pays a 3.6% dividend. Adding only a modest amount of capital appreciation results in reasonably solid shareholder returns.

But I’m skeptical that the risks facing General Electric justify acceptance of only a reasonable return. The Power and Oil Services businesses add cyclical (and political) risk to an already-cyclical business. GE’s cash flow has lagged earnings sharply of late, including in Q1.

There are real risks relative to GE stock — which means investors need to see real potential returns, not just a solid dividend. And it looks like it will take some time — likely years — before GE is even ready to drive the earnings growth needed to justify the current risks.

As of this writing, Vince Martin has no positions in any of the aforementioned securities.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/general-electric-company-ge-stock-could-feel-right-to-contrarian-investors/.

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