Even though General Electric (GE) revealed numbers this quarter that look average, I believe the company is anything but that. The stock is presently bullish and management is making smart moves to keep itself that way in the near and distant future. Let's take a look at the numbers this quarter and also how the business is focusing back on its "roots" and how it is paying off. GE is a good long term investment right now and also offers a perfect short term income opportunity.
GE Energy: Profitable and Soon to be Even More Profitable
GE has invested billions into new energy over the past few years which I consider a good move by a large conglomerate that can find its roots in the light bulb. At the same time it has been selling businesses it is not really known for, like selling its stake in NBC, commercial real estate and other businesses. This investment in energy has paid off. This division reported double digit growth helping GE as a whole top Wall Street forecasts in earnings. The increased profits for this division came in at 13% or $1.76 billion. This includes turbines (both wind and natural gas) and shipments of wind turbines doubled from a year ago to 726. I believe the investment in this one area has greatly contributed to the stock's bullish nature. Morningstar analyst Daniel Holland states:
"GE knows the energy and manufacturing businesses, and that is where it should remain."
To make this area even more profitable, GE is going to divide the energy sector into three smaller divisions: GE Power and Water in Schenectady, N.Y., GE Oil and Gas in Florence, Italy, and GE Energy Management in Atlanta. This move should streamline it even more and saving each division ($200 - $300) million per year. Smart business by GE.
The Numbers Don't Tell the Strength of the Company
The stock is rising presently and even though GE's net income fell 16 percent in the second quarter, it was not due mainly to a shrinking economy or core business. The weight of a $533 million dollar charge tied to the sale of its WMC Mortgage company and Japanese consumer finance business from 2007-2008 as well as pension payment adjustments showed up on the books this quarter and were mainly due to lingering charges from financing companies that were sold off several years ago. GE earned 38 cents per share, a penny above analysts' average expectations of 37 cents per share but fell short on revenue, (seems to be the pattern for the quarter for most companies) while revenue rose 2 percent to $36.5 billion, led by strong results in GE's industrial business. Analysts expected slightly higher revenue of $36.77 billion. The numbers do not justify how well the company has been doing.
GE is a slow and steady stock. It continues to move up in a wedge type pattern. The stock could continue to move down to about 19.90 from the peak and valley pattern. The RSI is very healthy as it continues to stay above the "50" mark which shows strength in the present movement. If we look at the blue 50 day MA we can also observe that it appears to have become the new support line. Short term, it looks like it will move back down from the top of the Bollinger Bands and then head back up.
The Options Play
GE is presently trading at 21.10, looks bullish in nature, but moves very slowly. My income strategy at this point will be contrarian because I believe we will see a pull back before it continues up. Since we are close to "21," I am looking at a bear put spread short term. Long term the business is a good investment and they are making wise choices. But for an income play we look shorter term.
- Buy a January 2013 put with a strike of '21' (priced at $1.38)
- Sell a January 2013 put with a strike of '20' (priced at $0.95)
- Net Debit to Start: $0.43
- Maximum Profit: $0.57
- Maximum Risk: net debit
- Maximum Length of Trade: 5 months
Reasoning Behind the Trade
- Bullish pattern moves up and down and we are looking at catching the pull back
- At the top of the Bollinger Bands presently, its pattern does move back.
- January 2013 gives up room for time decay since the stock moves slowly.