General Electric's (NYSE: GE) disappointing revenue miss in Q4 pushed the stock down more than 2 percent to a fresh 2-month low of $30.30. With this, the stock is roughly 6 percent off from its recent peak of $32.38. Is the dip enough to induce fresh buying interest in the stock or should investors wait for cheaper levels? There is no straight answer to this question but I hope readers will be able to make a better investing decision after reading this article.
Many investors are probably waiting for sub-$30 levels which are perfectly okay from technical and fundamental perspectives.
A glance at the multi-year monthly GE price chart below shows that whenever the stock has come closer to the upward sloping support trendline, it has generated good returns for the investors. This support is currently close to $28.
From the last closing price of $30.53, the support is distant by 8.3 percent. Now, many investors may not want to believe that the stock can test this support zone, but an important technical indicator, Money Flow Index, is showing strong divergence from the stock price action which has been sideways for the last one year. The MFI, after having sustained above 60 during the entire year-long consolidation phase, has plummeted below the 50-mark this month. This divergence should not be taken lightly as it means that there is a possibility that the stock price may extend the decline in the coming sessions.
Note - This is intended to provide a cautious approach rather than a bearish one. The long-term uptrend is still intact.
I advise waiting for slightly lower levels also because the stock's current valuations are slightly stretched. An important fundamental metric price-to-book value is rapidly inching closer to pre-recession highs as the book value continues to decline.
Although the YCharts data is not updated to reflect the latest earnings report, but it clearly reveals that GE's book value has been declining since late-2014. From the Q4, 2016 earnings release, the book value at the end of December 2016 has been found to be $75.8 billion - a new decade low. The sharp decline in the company's book value while the price has remained sideways has pushed the PB ratio to a multi-year high.
The YCharts data also tells us that the stock's price had closely tracked the book value for several years until it diverged in early 2015. For the last couple of years, the price has not fallen in tandem with the declining book value.
My insistence on choosing lower entry levels in GE is to account for such risks.
GE's current dividend yield of 3.05 percent is still near the lower end. History has shown that investors can easily lock in a dividend yield of 3.30 percent, which is possible if the stock were to get closer to $28.
Having established that GE would be a better investment post an additional correction of 6-8 percent, it must have confused (or even angered) some investors who bought in near the golden cross in early January when the stock was trading near $31.80. The golden cross is the event when the stock's (or any other security's) 50-day SMA crosses the 200-day SMA on the upside. GE's track record of returns when investing in golden crosses is dismal at best.
Has GE Become Oversold?
Well, the consistent selling pressure in GE has pushed it to the brink of getting oversold. The 14-day RSI and the 14-day MFI readings are 30.3986 and 23.3465 respectively.
From a historical perspective, whenever GE has entered the oversold territory, its stay has been brief, to say the least. Either the stock has risen following the event or has entered into a consolidation phase, both of which greatly diminish the probability of further declines.
Having understood the above points, it is now up to the investor to decide which investing decision to choose: Should he wait for more cuts in the stock price before increasing his exposure, or should he create a small position now as the stock has neared the oversold region? Although the answer to the above question is entirely dependent on an investor's risk appetite and his willingness and ability to dedicate funds and time, I am the type who does not rush in but waits for a better entry level, always. I recommend the same to my readers as well.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.