General Electric (GE) May Be Close to Rock Bottom

(Image credit: Carsten Reisinger 2015)

Now that the Dow Jones Industrial Average handed the once mighty General Electric (GE, $12.76) its much-anticipated disgrace, investors everywhere are asking once again: Is it finally time to “buy the bottom” in GE stock?

The answer is an unsatisfying “soon.”

Here’s why I say soon … and why I’m not saying now.

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The Dow’s Breakup With GE

The powers that be at Dow Jones announced on June 20 that they would remove General Electric’s stock from the venerable index on June 26, and put Walgreens Boots Alliance (WBA) in its place. After a 111-year continuous run and the distinction of being the last remaining original member of the DJIA, GE shares likely have lost their last claim to blue-chip status.

Of course, GE really hasn’t been a blue-chip in 18 years. From its perch as the world’s most valuable company, it peaked in 2000, failed to fully recover from the tech-wreck bear market and similarly failed to fully recover following the Great Recession. And since 2016’s high-water mark, the stock has lost nearly two thirds of its value.

The biggest argument now making the punditry rounds is that stocks perform well once they get booted from the Dow. There is indeed some data to back that up, suggesting the average cast-off beats the Dow over the next year by 6.4%. AT&T (T) shares rose 15% in the 12 months following its March 2015 ouster in a market that eased by about 2%. Alcoa (AA) more than doubled in price after its exit in September 2013.

However, General Electric faces real questions about whether it’s still a viable company and able to make enough changes to recover. Many of its core businesses are now gone, shed to stop the bleeding. It is hard to see how a company can purge its innards and remain viable as the same company.

Perhaps it will transition to align itself more with the new economy.

In 2015, GE launched an advertising effort to classify itself as a great place for newly minted Internet developers to work. That failed. Indeed, a total makeover for a conglomerate of this size seems unlikely in the short-term.

Many analysts and journalists are now busy slicing and dicing the remaining balance sheet and listening to management assurances that the latest setback, Dow removal, will not alter the company’s long-term plan.

Let’s take a different tack and look at what the stock market itself thinks.

Sentiment Matters

For starters, stocks that reach new yearly lows in an overall bull market are telling a very important message: The company is in trouble. And since the market is a forward-looking beast, the consensus view says there is very little on the horizon to cheer. In General Electric’s case, the idea is there is only so much cutting it can do before there is nothing left to generate any income.

Chart enthusiasts tell us not to catch a falling knife. Just ask “value investors” who bought GE stock at $25, then $20, then $15 over the past year as conditions kept deteriorating. Sometimes a stock gets beaten down for reasons not its fault. In a bull market, General Electric was its own worst enemy.

Stocks that suffer this fate may get very cheap on paper, but that does not mean they will move higher any time soon. Your money can just sit there for years before the bulls return.

That’s the bad news. When the market gives us a strong and steady bearish trend, the odds still favor lower prices. Selling creates losses, which in turn create more selling, and so on.

However, when participants in the market think there is no hope for a stock, conditions start to change. This is sentiment analysis, and when it reaches an extreme – pessimism, in this case – it creates an environment where even a small positive surprise can make an impact.

The reason is that after a long, drawn-out bear market, the last bulls finally throw in the towel. Theoretically, when “everyone” is bearish – and this means investors, not bloggers – then “everyone” already sold. Supply dries up leaving the stock vulnerable to a demand spark that lights this dried tinder.

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The news of the ouster did not create that clear, panicky capitulation from investors clamoring to get out at any price. Tuesday’s volume was heavy, but not unusual for General Electric over the past year.

That leads to the conclusion that sentiment is very bearish, but not so extreme that it sets up a “must buy” contrarian situation.

If individual investors do decide to panic, then it might happen.

The alternative is for the public to simply forget about GE. They won’t sell because they’ve already suffered huge losses and cling to hope that a recovery can get back at least a portion of their investment. Unfortunately, shares can bump along the bottom for months before slowly gaining fans.

What to Do With GE

Buying now and waiting for that to happen can result in a long period of underperformance. Some might think its 3.7% dividend yield is enough compensation for the dead time. But analyst firms including JPMorgan are still questioning the payout, even after General Electric halved it last year.

The other numbers still look bad from a volatile downward trend in earnings, to lower margins and an unhealthy debt-to-equity ratio of 1.3. It cannot even cover its interest payments right now, according to its negative interest coverage ratio (earnings before interest and taxes, or EBIT, divided by interest payments).

Will institutional shareholders defend GE? Or will they become activist investors, pushing management to change? Will the new management team purge the culture of losing?

Whatever you do, don’t listen to Wall Street. Of the analysts monitored by MarketWatch, only two say buy, 11 say hold and two say sell. This is about the same as it was last month and even three months ago. Their opinions have been no help to those seeking advice on GE.

Look for one of two signs that the bottom is actually in. The first would be a massive selloff that flushes away any semblance of bullishness once and for all. The second would be a slow fade from memory as investors focus on other, more profitable stocks. When nobody is looking, then the stock has a chance for a rebound.

While it is very tempting to buy GE stock now, it is probably better to let the market tell us when the time is actually ripe. Keep this idea on the shelf for now.

Michael Kahn, CMT (Chartered Market Technician) has been writing about the markets since 1986. He is the author of three books on technical analysis published in five languages. His specialty: jargon-free analysis accessible to everyone. He has contributed to many leading financial media including Barron's Online, MarketWatch and Nightly Business Report and was the Chief Technical Analyst for BridgeNews.