Shares of General Electric (NYSE:GE) have shown some life recently amid a massive shift in the financial markets from momentum names to value names. Long story short, investors piled into momentum, growth stocks over the summer as recession fears dominated the market because those stocks, with their non-cyclical tailwinds, can head higher even if the economy weakens.
Fears of a recession, however, have cooled substantially over the past few weeks. As a result, many investors have sold their popular momentum stocks, and bought beaten-up, economically-sensitive value stocks.
Amid this huge market shift, GE stock price has rallied. Over the past two weeks, General Electric stock is up more than 15%. Now the question is, will GE stock price continue to climb?
I think it will, for three main reason. First, the fundamentals and valuation of GE stock look good under $10. Second, the outlook of the industrials sector should improve over the next few months. Third, the technicals imply that GE stock is in the first few innings of a multi-month breakout.
Consequently, while the rally of General Electric stock has been put on hold for the past few months, it looks like the shares are about to start climbing again. Over the next few months, I think GE stock can and will grind higher.
When it comes to the fundamentals underlying GE stock, there are two main things to watch: debt reduction and operational simplification. That is, in order for GE stock to head higher and act like a normal industrial name, management needs to reduce the company’s high debt load and simplify and optimize its operations.
Right now, management is successfully doing both of those things.
Over the past six months alone, General Electric has sold its aviation lending business, its biopharma unit, and its commercial LED and traditional lighting business. By taking those steps, the company has done two things. One, it’s reduced the number of businesses owned by the company.As a result, GE will be able to allocate more resources to its more important, more relevant, and more profitable businesses, like Aviation. Two, it’s generated billions of dollars from these asset sales, which it’s used to reduce its debt.
In other words, GE’s management is doing everything it needs to do to make GE smaller, simpler, more profitable, and less indebted.
As long as the company remains on this trajectory, then current Street estimates calling for earnings per share of 90 cents by fiscal 2021 seem entirely reasonable. At that time, GE stock should trade like a normal industrial stock, as its headwinds move into the rear-view mirror. Industrial stocks normally trade around 15 times their estimated forward earnings. A forward multiple of 15 on an estimated 2021 EPS of 90 cents implies a 2020 price target of roughly $13.50 for General Electric stock.
GE stock trades under $10 today. Thus, over the next 12-16 months, the fundamentals imply that GE stock price can jump 35%-plus.
The outlook of industrial stocks have been depressed by economic slowdown fears for the past several months. But those fears are starting to ease now. They should continue to ease for the foreseeable future. As they do, investors’ view of the industrial space will improve, lifting the whole sector, General Electric stock included.
In a nutshell, markets were very worried in August 2019 that a recession was looming, mostly for three reasons. First, global data was indicating that the economy was slowing. Second, the Fed didn’t sound super dovish in late July. Third, President Trump upped the trade-war ante with China, causing long-term interest rates to drop below short-term rates., In the past, that situation has usually indicated that a recession will occur soon.
As these recession fears grew, investors ditched economically-sensitive stocks that require a good economy to go higher. Industrial stocks are definitely in that category.
Now, though, the tide has turned. Global economic data is improving, as most clearly evidenced by the stabilization of the OECD’s global composite leading indicator. The Fed has sounded a more dovish tone over the past few months, and has stated that it will do its best to sustain the current economic expansion. And, perhaps most importantly, trade tensions have cooled meaningfully, with trade talks set to resume and more tariffs being delayed.
Consequently, the recession fears which dominated the investment landscape in August are now easing. As they ease, the outlook of the industrial sector will improve, creating a rising tide which lifts all industrial boats, including GE stock.
The third main reason to like GE stock here and now is that the stock is on the cusp of a technical breakout . Such a breakout only happened for a brief stretch in the past year, leading to a huge rally by GE stock. A similar scenario could unfold soon.
Specifically, GE stock price is about to break above its 50-day moving average after spending a few weeks below that metric. Over the past year, General Electric stock only accomplished that for a brief period. . When it happened before, back in late 2018 and early 2019,,GE stock price responded by surging from about $8 to about $10.
The same pattern is emerging today. Will it produce a similar result? Given GE’s favorable fundamentals and its improving outlook , I think it will.
I’ve cautioned against buying General Electric stock for the past few months, saying that GE stock price would not rally. Indeed, over the past few months, GE stock has gone nowhere.
But that situation appears to be changing. The fundamentals and outlook of GE stock are improving. Consequently, GE stock price should climb over the next few quarters. At the same time, the chart is starting to show that General Electric stock can break out.
As a result, GE stock price finally looks ready to rally again.
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