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Fundamental Analysis

A Contrarian Call on General Electric

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The General Electric (NYSE: GE) stock has been a huge under performer in 2017. It has fallen more than 43%, year to date while the S&P 500 is up about 15%. That says the kind of negativity surrounding the stock.

Important points

  1. GE stock is being clobbered after it slashed its dividend by 50%
  2. The company will sell $20 billion of assets
  3. CEO John Flannery has laid out plans to turnaround the company
  4. We like GE as a contrarian bet

On Monday, during an investor day presentation, the new CEO of the company John Flannery outlined plans to turnaround the company. The stock reacted by falling more than 7% on the same day. If that was not enough, it was followed by another 5.89% drop on Tuesday.

The investors are bailing out of their positions in a hurry, plunging the stock below $18 levels. We, however, would like to go contrarian here and add GE to our portfolio. We believe that at the current prices, the downside risk is minimum while the upside potential is huge, if the management can walk the talk.

What are the reasons for our optimism, especially when others are in a hurry to sell their holdings.

GE is the original Dow stock

The company was originally established by the great Thomas Alva Edison in 1890. A company that has survived for the past 127 odd years certainly deserves credit for its resilience. From the first light bulb to the age of super computers, the company has seen it all.

It has been able to reinvent itself and survive all the technological changes. It is the only original surviving Dow stock that was first included in the index in 1896.

However, we have seen many erstwhile companies flounder and go bankrupt. Is there a chance that GE will also follow suit? Let’s look at GE’s results and analyze how bad is the situation.

GE’s financial performance

The company’s performance has been sluggish in the past five years, which shows that the management did not take the necessary steps to overcome the plaguing issues.

  2012 2013 2014 2015 2016 YTD 5-Yr Growth
Revenue in billions 146.68 113.25 117.18 117.39 123.69 90.69 -3.33
Operating Margin % 20.31 13.65 14.19 14.36 14.42 11.9 -9.38
Diluted Earnings Per Share 1.29 1.27 1.5 -0.62 0.89 0.41 -0.06

Source: Morningstar

The above figures show that if the management doesn’t take the corrective steps soon, the company is unlikely to emerge from its downward spiral.

However, though the results are poor, GE is unlikely to go out of business anytime soon. It still has leadership position in its niche sectors. It only has to reorganize itself to emerge stronger.

What are some of the steps announced by the new CEO

We like a company’s CEO who accepts that there is a problem, which needs to be addressed. If the CEO backs his words with some unpopular measures for the long-term betterment of the company, we start to believe in the turnaround story.

Flannery did just that. He slashed GE’s dividend by 50%, from 24 cents quarterly to 12 cents, a move that is likely to hurt a lot of investors who had bought the stock for its dividend yield. This explains the plunge of the past two days.

However, the dividend cut will save the company $4 billion annually, which can be put to use for the turnaround.

Recent history shows that a dividend cut has been positive in the long-term

The S&P Global points to four companies – Pfizer, Abbott Labs, Kinder Morgan and Conoco Phillips – that have seen the largest dividend cuts since the financial crisis. A year after cutting their dividends, Pfizer rose 28%, Abbott 44% and Conoco Phillips 49%. The only laggard was Kinder Morgan, which was lower by about 4%.

Though this is not a very dependable reason to buy GE, it certainly shows that the companies that have used the money saved from dividend cuts smartly have rewarded the long-term investors.

What else does Flannery plan to do other than cutting its dividend?

Many analysts have said that GE had become unmanageable. On that front, Flannery has said that GE will be “more focused” and will shed assets worth about $20 billion. This is in contrast to the earlier two CEO’s Jeff Immelt and Jack Welch, but this is what the company needs at the moment. Power, aviation and health care are going to be the main area of focus.

GE will induct three new members into the board of directors, but will reduce the board’s size from 18 to 12. The board has also given a seat to Ed Garden, co-founder with Nelson Peltz of the $13 billion Trian Partners hedge fund. Peltz has taken more than a billion-dollar hit on his GE stake of about 70.9 million shares, disclosed in October 2015.

The lower guidance for 2018 is a welcome reset

Few analysts are negative following GE’s dismal guidance for the next year. The company cut its 2018 EPS guidance to $1.00-$1.07, well below the consensus street expectation of $1.28. However, we view this as a positive.

By doing this, Flannery has given himself enough room to maneuver without having to worry about disappointing the street. Also, he would want to start his innings at GE on a positive note, therefore, he is likely to give a guidance that he can easily beat. Hence, unlike others, we are not downbeat after seeing the lower guidance.

Shouldn’t we buy after the turnaround happens?

GE is looking to undo its previous mistakes and work towards a turnaround. Though turning a $155 billion behemoth is unlikely to happen quickly, we believe that positive indications can be seen within a year. As the stock markets are forward-looking, the stock price will start to recover well before the results turn positive.

What does the chart forecast?

GE has been in a long-term downtrend. With the plunge of the past two days, price has reached the downtrend line, which is likely to act as a support. Additionally, the 61.8% Fibonacci retracement level of the rise from the lows of 2009 to the highs in 2016 is at $17.17. As these two supports are close by, we expect the stock to find some support at the $17 levels. The RSI has also fallen into the oversold zone. Previous oversold readings on the RSI have led to a recovery in price. However, if the support breaks, the stock is likely to slide to its next major support of $14.

As the stock is currently in a downward momentum, we recommend buying GE in batches, instead of buying it all at once. The first lot of about 2% of the portfolio can be bought at the current levels. We, eventually, want to increase the stake to about 5% of our portfolio. Sharp intraday dips can be used to accumulate positions on the long side in the next few days or weeks.

For ease of calculation, we shall consider the purchase price as $18. This is the second stock in our portfolio, after the purchase of AT&T a couple of days back.

Risks

GE’s turnaround will suffer if the world economy slows down. The Chinese slowdown, the middle east unrest, the Brexit issues and other geopolitical issues can put brakes on the already anemic global recovery.

Flannery has a tough job at hand. Any misstep in the execution of the turnaround plan can sink the stock further.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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2 Comments

  1. emceeanders

    November 15, 2017 at 8:11 pm

    What’s the profit target?

    • Rakesh Upadhyay

      November 16, 2017 at 2:49 am

      Hello emceanders,

      If CEO Flannery is able to pull off the turnaround, a move to $33 and higher is certainly possible within 2-3 years.

      With warm regards
      Rakesh Upadhyay

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Altcoins

EOS Price Forecast: EOS/USD Heading for Another 300% Move?

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  • EOS/USD price action via the 4-hour chart view has formed a bullish flag pattern.
  • The price is moving around levels seen back end of March to early April, before a bull run of over 300%.

The past six sessions for EOS/USD have been erratic to say the least. It has been subject to a high amount of volatility, swinging aggressively in both directions. There has been a lack of commitment from either the bear or bull camps of late. As the market continues to trade with such behavior, it appears to be trying to find its feet, ahead of a potential chunky firm trend.

EOS DApp Hacked Again

An EOS based gambling DApp, EOSBet has been hacked, with $338,000 being reported as stolen. This isn’t the first time; just back in September, hackers managed to get away with a reported 40,000 worth of EOS, which at the time had a value of $200,000. It has been said that they were able to exploit their smart contracts, having found security vulnerabilities.

Technical Review – 4-hour Chart View

EOS/USD 4-hour chart

EOS/USD price action has formed a bullish flag pattern, which began taking shape on 15th October, after the aggressive price behavior stabilized. The bulls at the time ran the price well up into $6 territory. Consequently, it then met the breached ascending trend line, failing to move back above this area. This followed the sharp breakthrough to the downside, which occurred on 11th October. As a result, a drop of over 15% was seen, forcing EOS/USD to retreat in a demand area, within the $5.0000 level proximity.

Looking to the upside, small near-term resistance is seen at around $5.6100, which is the upper trend line of the mentioned bull flag pattern. A breakout will likely open the doors to a retest of the broken ascending trend line, tracking around $6.1100. Support can be eyed at $5.4600, which marks the lower trend line of the flag. Furthermore, should this fail to hold, EOS/USD could likely fall back down to the serving demand area, within the lower $5.0000 territory.

April 2018 Bull Run

EOS/USD April bull run

In April of this year EOS/USD entered a chunky bull run, gaining over 300%. From the back end of March until 11th April, the price had been stuck within consolidation mode. Resulting in the price trading within a tight range, at levels of where the price is currently seen today.

Something quite astonishing started to unfold. Between the period of 11th April to the 29th April, a bull run of around 290% was seen. Over this time frame EOS/USD went from $5.9500 up to a high of around $23.0811. The price is currently demonstrating a similar behavior to that of what was seen during the mentioned period. It is interesting to note that the price did have historical levels to break through, as it had already run higher during the period of December 2017 and came back down. Finally, this is not to say EOS/USD will observe the same bull run. However, it is an interesting observation to be aware of.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 31 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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Altcoins

TRON Price Analysis: TRX/USD Cools After Reports Suggest of Potential Baidu Partnership, but Not Blockchain Focused

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  • Reports of TRON and Baidu partnership focused on cloud computing resources.
  • TRX/USD price has cooled over the past two sessions, but supported within an ascending channel.

Potential TRON and Baidu Partnership – Not Blockchain Related

The founder of TRON Justin Sun, had left the community very excited on Friday, after tweeting “Finally, First time to partner with tens of billions USD valuation industry giant. Guess the name.”

According to ODaily, a local Chinese newswire, the partnership will be focused on cloud computing resources, not blockchain. It covered that TRON would be buying cloud computing resources from China’s equivalent to Google, Baidu. This was cited and translated by CNLedger.

If this being the case, it could be somewhat disappointing for some of the TRON community. There would have been general expectation and hope, of this being related to the foundation’s blockchain network. As it states the partnership remains focused on the purchase and use of Baidu’s basic cloud computing resources, rather than being a connection “at the blockchain business level.”

The report covered that Tron and Baidu will be working to maximize inter-compatibility. In addition, “to build, operate and debug blockchain products” based on Baidu Cloud. Baidu and Tron have not yet formed any connection at the blockchain business level. Currently the cooperation mainly focuses on the purchase and use of (Baidu’s) basic cloud computing resources.” As covered by CNLedger’s translated report.

Despite the circulating details, there has not been an official confirmation from either TRON or Baidu.

TRON Launches TronGrid

Most recently, TRON launched a website known as TronGrid, which will toolbox for developers. As a result, it will assist them in being able to integrate DApps smoothly into the TRON ecosystem. The move somewhat similar to Ethereum’s Infura.

Technical Review – 4-hour Chart View

TRX/USD 4-hour chart

TRX/USD price has cooled over the past two days now. Following a large spike up to $0.027980 on 15th October, the price had headed deep into a known supply zone. This is seen tracking form around $0.02700 – 0.028500 range. As a result, sellers forced TRX/USD back down within an ascending channel pattern.  It has been grinding higher within this channel since the 12th October.

Given the cooling in price action, it is worth noting the support seen at the lower trend line of the mentioned pattern. Furthermore, comfort can be observed around $0.024850. A breach may see a very fast move back south, reversing the upside move from 12th October. This could see a drop down to $0.020670.

Looking to the upside, should this ascending channel continue supporting the price, as it has been. Then expect bulls to give the near-term supply zone another retest. However, this area has been respected since the back-end of September. It is evident that sellers remain camped within this territory, not an easy task for the bulls to break down. ­

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 31 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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Analysis

Oil Bears Decide to Take a Break

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Author: Dmitriy Gurkovskiy, Chief Analyst at RoboForex

On October 16th, the oil market remains under pressure from the bears, though the amount of sale has reduced a bit. At the same time, market sentiment is still quite cautious. Brent is trading close to 81.00 USD today with the weekly low at 79.85 USD. WTI costs 71.70 USD.

According to the Commodity Futures Trading Commission, in October global investors are decreasing the net long position in Brent. By October 9th, the amount had fallen up to three-week lows and was equal to 475.5K contracts (-6.4K.). At the same time, the short position hit four-week highs.

On one hand, the USD behavior offers the oil market an opportunity to recover after sales. On the other hand, the oil rally that occurred not long time ago gave a boost to American companies involved in shale oil production: the more expensive the oil, the more profitable the production and the expansion.

In this light, the statistics on the Crude Oil Inventories and the Natural Gas Storage to be published this week may show excellent numbers. Last week, indicators increased significantly, thus allowing “bears” to become more active. One shouldn’t exclude a possibility that the same might happen this week as well.

In the H4 chart of Brent, the price is trading downwards; it has been already corrected to the downside by 38.2%. The graphical analysis indicates after testing the support line of the descending channel, the price is trying to enter the downside projected channel. Taken together, these facts imply that on its way down the instrument may reach the retracements of 50.0% and 61.8% at 78.63 and 76.61 respectively. The resistance line for the current trend is at 83.08.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 15 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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