With the arrival of CEO Larry Culp, some investors hoped that General Electric (NYSE:GE) would have another chance at a turnaround after several rough years. It hasn’t been an easy time for Culp and for GE stock holders, especially with the novel coronavirus pandemic impacting the economy in 2020.
Credit must be given to loyal GE shareholders who’ve waiting patiently while the company attempt to regain its footing. The transition to a provider of airplane components hasn’t been easy. And of course, the pandemic really threw the company for a loop.
Given the persistent price pressure on GE stock, some analysts have lost patience with the company. Yet one financial expert has stood out in his ultra-bearish outlook.
Indeed, by big-bank analyst standards, this particular analyst has gone absolutely savage on GE stock. Does this mean that the shareholders should cut and run? Or, just maybe, could this be the ultimate contrarian play for bold long-term investors?
A Closer Look at GE Stock
Traders who focus on a stock’s momentum could certainly build a bearish case regarding GE stock. Amazingly, this stock is trading at around the same price that it did in 1991.
For multi-decade investors, all I can say is, thank goodness for dividends. Otherwise, you’d have little to show for your stake in GE stock. The fact is, there’s been an unsettling series of lower highs in the share price since the year 2000.
Moreover, GE stock has floundered since the onset of the coronavirus. While technology and other sectors have largely recovered, General Electric’s heavy involvement in the aviation sector has evidently kept the GE share price grounded.
Thus, GE stock is nowhere near the pre-pandemic price point of $13. If the bulls can at least get the stock price back to $8 and then $10, that would go a long way towards instilling confidence in the company’s hapless shareholders.
J.P. Morgan analyst Stephen Tusa hasn’t been General Electric’s biggest fan. In fact, at one point Tusa assigned GE stock a price target of $5. That, in itself, was a harsh outlook on what some people consider to be an American icon of a company.
However, that was just the beginning. Recently, Tusa’s stance on GE stock took a turn for the worse. Specifically, he withdrew his price target on the stock entirely. Now, that’s something you don’t see every day from big-bank analysts.
Adding insult to injury, Tusa commented, “We are more negative on GE as we turn the corner into [the second half]… We see little equity value here.”
Is Tusa using euphemistic language to say that GE stock is headed to zero? If so, that’s a bold statement. Evidently, Tusa is concerned that General Electric’s management hasn’t called for positive free cash flow in 2020’s second half.
Inch by Inch
If that’s Tusa’s concern, it shouldn’t be enough to warrant such a bearish outlook for GE stock. As Culp eloquently explains, long-term investors should appreciate the baby steps towards solvency:
“Better earnings and cash performance in the second half are achievable based on what we see today and the aggressive actions we’ve taken… It remains a game of inches… We’re increasing our focus on lean and taking action on the factors within our control.”
In other words, it’s short-sighted to demand positive free cash flow this year. Besides, not everyone on Wall Street is as pessimistic as Tusa. For example, Credit Suisse analyst John Walsh envisions General Electric as generating $1 billion in positive free cash flow during this year’s second half.
The Bottom Line
Currently, the average analyst price target for GE stock is close to $8. For Tusa to assign a price target of $5 and then withdraw it completely seems overly dramatic.
One inch at a time, Culp and General Electric are working towards a brighter fiscal picture for the company and its shareholders. For the long term, GE stock could be a terrific contrarian investment, even if Tusa refuses to acknowledge it.