General Electric: The Bears Are (Finally) No Longer Running The Show

Summary

• General Electric's stock has performed well so far in 2019, but it is still down by ~23% over the last year.
• I believe that the bears are no longer running the show, but any serious misstep by management will change this in short order.
• I am long General Electric, and I plan to stay long through at least 2021.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

General Electric (NYSE:GE) has a lot to prove to the market before it is able to get out of the dog house, but I believe that the company's new(ish) CEO, Mr. Larry Culp, has been able to greatly improve investor sentiment since taking over in late 2018. To this point, GE shares are significantly outperforming the broader market on a YTD basis.

Data by YCharts

The stock is still materially lower than it was 52 weeks ago (down over 23%), but, in my opinion, the narrative for this company/stock has changed (for the better). More specifically, headline risk has played a major role in the movement of GE's stock price for the last two-plus years, but Mr. Culp has finally convinced the market to focus more on the story/data than the noise. It appears that the bears are no longer running the show.

The Bears Are Still Roaring, But Does It Really Matter Anymore?

Image Source

In the past, GE's stock price would drop significantly (and would stay down) whenever the company's biggest bear, JPMorgan's Mr. Stephen Tusa, released his reports, but this has not been the case so far in 2019. Mr. Tusa has released at least 5 bearish notes on GE over the last five-plus months, but the stock price has not fallen off a cliff it did in the past. For example, the chart below identifies the date of 4 bearish calls made by Mr. Tusa in 2019.

Source: Chart from Yahoo Finance

As you can tell, the stock has either not traded down or recovered after each of the bearish calls. In 2017 or 2018, GE's stock would sink lower (and would not recover) almost every time a Tusa bearish note was released.

Most recently, Mr. Tusa released another bearish note questioning GE's near-term prospects, while maintaining his Street low price target of $5 per share. He raised concerns over some of the positive news flow:

"Orders are important for growth; however, for a company that has acknowledged chasing deal announcements despite unfavorable price and/or terms/risk, and one that has claimed to no longer promote market share as the main goal, recent developments raise questions around how much change has actually occurred," Tusa wrote in a note to clients. Although GE booked a "substantial amount" of orders in the fourth quarter, he said he's not sure what the economic value of those deal is, other than a temporary cash beat, as GE's renewables business is booking losses this year on material volume increases and negative free cash flow, which he doesn't expect to recover much, even next year."

To me, Mr. Tusa has not come up with anything new for his bear story and, instead, has continued to raise the same "concerns" over and over again. There is no denying the fact that Mr. Tusa has been right on this stock for years (see some of his calls on GE here), but I am now starting to question what exactly these "new" bearish reports are bringing to the table. In my mind, Mr. Tusa's early calls on the Power downturn and related cash flow/debt issues were on target, but the latest concerns over the "economic value" of the deals that GE is booking seem like a stretch.

At the end of the day, headline risk has been the risk since Mr. Jeffrey Immelt stepped down as CEO, but I believe that Mr. Culp is finally turning the page. The bears still have a story to tell, but, if you ask me, their roars are starting to mean less and less, especially when the same old song keeps being sung.

Who Let The Bulls Out?

It was hard (or should I say impossible) to find analysts that are bullish about GE, and rightfully so, but it is encouraging that some bulls are starting to jump on the train. To start, William Blair's Nicholas Heymann kept his Outperform rating on the stock and said that GE shares are likely to "materially outperform" the broader market over the next year. He mentioned that Mr. Culp's time and effort turning around Power is going to bear fruit sooner rather than later. Moreover, Mr. Heymann noted that a change in confidence could propel the stock to the $14-16 range over the next 12 months.

Additionally, Bay Crest Partners' Jonathan Krinsky recently wrote that GE's stock looks like a buy based on its technicals. Mr. Krinsky called for the stock to hit the $14-15 range "in the coming months".

While I do agree that GE's stock is in a position to outperform the market, especially if sentiment continues to improve, the $14-16 range seems high to me. However, it should be noted that there are definitely reasons to be optimistic about GE's long-term business prospects.

Source: GE Presentation

Simply put, this company has one-of-a-kind portfolio of businesses with a few kickers, e.g., optionality to monetize its assets. For example, the Baker Hughes (BHGE) and Wabtec (WAB) positions are likely the first to go, but let's not forget that Mr. Culp also has other cards to play too - what's left of GE Healthcare after the Danaher (DHR) deal, the company's venture portfolio, and many more.

The bulls have a good story to tell and the biggest bull around, Mr. Culp, has been able to change the narrative. The company still has a lot of work to do, with Power turnaround being on the top of the list, but I believe that the pieces are finally starting to fall into place.

Bottom Line

To clarify, GE is not yet in the clear, and it probably will not be any time in the near future. However, it is important to remember that the worst has likely already priced into the stock so, in my opinion, almost any positive developments will go a long way.

The bears will still hear loud and clear, but, in my mind, they are no longer running the show. A few missteps by GE's management team will definitely change this but, as I have said several times in the past year, I believe that Mr. Culp is the right guy for the job. He has the experience, and he has surrounded himself with a board that has what it takes to turnaround this once-great company. A lot of the stock movement over the next 12-18 months will likely be based on sentiment, so it is encouraging that there is a supportable investment thesis for this industrial conglomerate.

GE is definitely still a 3- to 5-year story, but I believe that the stock is a great long-term investment, if it meets your risk/return profile.

Disclosure: I am/we are long GE, WAB, BHGE. 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.