It's only been two weeks since I wrote about some optimism in Action Alert PLUS holding General Electric (GE) . The stock traded around $18.33 at the time of writing. Two weeks later and the darn thing is back to unchanged after flirting with $19.50. Right now, I feel confident about two things:
- A break-up is coming
- Any remaining trust of management is gone
The dividend cut was a kick between the legs for many long-term investors, although it was evident the company had to do something. Today's news is another kick followed by a cartoon coyote dropping an anvil on investors from high atop 30 Rockefeller Plaza. Everything you thought you knew about GE is in the past.
Much of my optimism around the stock was driven by the $3.5 billion in cost reductions set to hit the top line. I evened looked past the 12,000 reductions in headcount. However, this morning the company announced it would take a $9.5 billion pre-tax charge ($6.2 billion after-tax) to make statutory reserve contributions for its run-off insurance portfolio, North American Life & Health. Over the next seven years, those contributions will swell to $15 billion. That's more than 4 times the level of "cost-savings" that drove prior optimism. Keep in mind $15 biliion is about two years worth of net income currently. For those folks holding their breath for a return of prior dividend levels, you'd better inhale because it is going to be awhile.
Instead, we are going to see a split, which becomes scary in and of itself. What else does GE plan to bury in the closet when it breaks into smaller pieces. The key will be to focus on pieces that won't carry liability with them. That means no buying GE pre-spinoff with blind eyes. We've seen some old-line names like Delphi do fantastic splitting themselves, but the news this morning should cause many investors to pause initially when GE splits. Clearly, the company hasn't done a solid job disclosing potential liabilities from its $100 billion in spin-offs over the years and if it doesn't worry you, it should.
Two weeks ago, I thought Baker Hughes General Electric (BHGE) offered the better play. The stock is up 10% from that time. I'd be taking profits here. It's hard to put any trust behind any name with General Electric in it. Many old investors are rolling over in their grave hearing that line, but with the markets soaring and so many emerging sectors on the horizon, why invest with a management that has lost the trust of the market.
The good news for GE longs here is the technical picture isn't broken. It's not as pretty as it was just two weeks ago, but as long as shares hold $18, the daily picture is merely neutral. Momentum is plummeting from overbought territory, but the 20-week simple moving average and prior resistance offer support at $18. Unless we close under $17.25, we should expect a new trading range between $17.85 and $18.85 to develop.
The weekly view is basically the same in terms of support. The current uptrend line pegs $18 as the immediate level to watch and $17.25 as the long-term level. Resistance is the recent $19.40 high. Given the dismal 2017 performance, shares are nowhere near overbought in terms of momentum or trend. In fact, GE is still oversold.
In the end, I would only ask one question: why? Why buy or continue to hold shares?
Wait for the breakup. There will be a piece or two worth owning, but the majority of the company is rotten at the moment. Wait for the rotten pieces to be removed before taking action.