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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.

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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.

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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. 

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2 Comments

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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Analysis

$100 Litecoin Looks Poised for Greater Upside

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Litecoin prices moderated on Tuesday, but continued to hold above $100 as the outlook brightened on the world’s no. 7 crypto.

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LTC/USD Price Levels

The Litecoin-dollar exchange rate slipped on Tuesday, but continued to trade near record highs. At press time, prices were down 1% at $100.75 for a total market cap of $5.5 billion.

Trade volumes reached $338 million over the past 24 hours, which is equivalent to roughly 29,290 bitcoin. That’s well below the nearly $636 million in turnover witnessed Dec. 2.

Nearly 20% of transactions on Tuesday occurred on the GDAX platform. The OKEx exchange accounted for roughly 15% of the volume. Crypto juggernauts Bitfinex and Bithumb turned over between 8% and 10% each.

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The cryptocurrency has added more than 7% over the past five days and is strongly bullish, based on the MACD and RSI charts. An RSI reading of 74 suggests the buying frenzy may be overdone and due for a minor pullback.

Prices peaked above $106 earlier this week for a new all-time high. Litecoin’s 52-week trading range is between $3.46 and $106.22, which represents a change of nearly 3,000%.

The next major milestone for Litecoin appears to be $110. Based on recent price action, that level appears to be a foregone conclusion as capital continues to pour into the altcoin market.

Litecoin’s Bright Future

LTC is enjoying tremendous support from the broader cryptocurrency community. Its gains have been partly attributable to bitcoin’s meteoric rise. As a less expensive, more readily available cryptocurrency, Litecoin is widely considered to be the silver to bitcoin’s gold. This means both cryptocurrencies often trade in the same direction, despite vastly different price points. This makes perfect sense, given that Litecoine was created as a hard fork of the original bitcoin blockchain.

One of the chief advantages Litecoin has over bitcoin is its focus on small transactions. The payment platform targets businesses that require a large volume of smaller transactions that need to be processed fairly quickly. Litecoin processes a block every 2.5 million, which is a fraction of bitcoin’s 10-minute mark.

Bitcoin’s viability as a payment system has been brought into question by many within the cryptocurrency community. That largely explains persistent efforts to fork the cryptocurrency in favor of a scalable alternative.

Litecoin is also considered one of the most attractive altcoins due to its inclusion on the Coinbase trading platform. By being listed on Coinbase, LTC joins elite company in bitcoin and Ethereum.

Coinbase is the largest U.S.-based cryptocurrency exchange and has more users than brokerage Charles Schwab. Coinbase currently has more than 13.3 million users, according to industry data. That includes 300,000 users in the last week of November. By comparison, Schwab reported 10.6 million active accounts for October.

 

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.

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Altcoins

Dash Has Tripled in Value Over the Past Month

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Dash cryptocurrency has put together an impressive month of gains, with prices tripling in value on renewed global demand and upbeat investor sentiment.

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Dash Price Levels

Digitalcash (DASH/USD) saw little upside on Monday, with prices eventually falling 2.4% to $765. The digital currency is trading $45 below last week’s record high, but has still managed to add a whopping 21% over the past five days.

At present values, Dash is worth a combined $6 billion, placing it fifth among active cryptocurrencies. Only bitcoin, Ethereum, bitcoin cash and Ripple XRP are worth more.

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Trade volumes have reached $193 million over the past 24 hours, with HitBTC accounting for the largest share of activity. Binance, Bithumb and Bitfinex were also among the volume leaders. These four brokerages combined for about 50% of the daily turnover.

Since Nov. 2, Dash has nearly tripled in value. Its gains have occurred in lockstep with the broader cryptocurrency market, which has been aided in large part by active Korean trading desks.

Block Upgrade

The cryptocurrency has also benefited from the release of Dash Core version 12.2, which lowered transaction fees by ten times and upgraded the block size to 2 MB. The update was successfully implemented on Nov. 8. Dash’s core team referred to version 12.2 as a “major update” that required the urgent attention of “end users, pool operators, exchanges and masternode owners.”

The privacy-focused altcoin has enjoyed strong backing for years, with many cryptocurrency enthusiasts impressed by its incentivized full nodes, instant transactions and built-in coin mixing. Of course, Dash also promotes completely private transactions, making it an important player in the decentralized currency market. In this vein, it is considered by many to be the next generation bitcoin, only a significant cut above thanks to features like InstantSend, PrivateSend and completely decentralized self-funding governance.

Zimbabwe Partnership

Dash was in the news last month after the project announced a partnership with KuvaCash to fight inflation in Zimbabwe. The African nation was forced to abandon its local currency in the aftermath of the financial crisis as hyperinflation took root. Under the partnership, Dash aims to provide Zimbabwe with its first localized cryptocurrency service. To access the service, users only need a phone-number-based messaging system.

“I have been advocating for quite some time the potential benefits Dash can provide to economies with less stable currencies, and Zimbabwe seems a prime location for these benefits,” Dash Core CEO Ryan Taylor said of the decision. “This project in particular is well-researched with value propositions, branding, and go-to-market strategies tailored to the local market. Combining the ideal network – Dash – with a well-considered strategy should lead to a high probability of success.”

Even cryptocurrencies have been known to trade at a large premium on the Zimbabwean exchanges. One month ago, bitcoin was marked at a nearly 90% premium in the country. That was equivalent to roughly $12,400 at the time. Globally, the BTC/USD was marked at $6,700.

The country has been under renewed political pressure since a coup upended 93-year-old ruler Robert Mugabe. Mugabe had served as head of state for nearly four decades.

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.

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Altcoins

Bitcoin’s Biggest Rival? Litecoin Stabilizes After Massive Correction

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After a volatile 24 hours, Litecoin prices showed signs of stabilizing Friday as investors speculated about the digital currency’s ability to de-throne bitcoin.

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LTC/USD Price Levels

The LTC/USD exchange rate plunged 26% on Thursday to touch the lower $74 level. At the time of writing, prices had recovered near $82.50 for a total market cap of around $4.5 billion. The cryptocurrency had virtually doubled between Nov. 2 and Nov. 29 in a period of general euphoria for cryptocurrencies.

Litecoin wasn’t the only digital asset to suffer a double-digit correction earlier this week. Bitcoin Cash and Ethereum also plunged more than 20% on Thursday. Both currencies found stability on Friday, although Bitcoin Cash was still headed for weekly declines of more than 20%.

Litecoin’s precipitous drop followed another record-setting surge that took prices above $100 for the first time ever.

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Turnover in LTC trades has reached $429 million in the last 24 hours. About one-fifth of the activity was concentrated on the GDAX exchange. Bitfinex and South Korea’s Bithumb also saw roughly 11% of the daily volumes.

Bitcoin Rival?

The cryptocurrency market was in a state of buzz Thursday after The Motley Fool ran a compelling story about Litecoin’s potential to overtake bitcoin.

Litecoin’s price trajectory since the start of the year has largely mirrored the broader cryptocurrency market. However, its exposure hasn’t come anywhere near bitcoin’s or some of the other leading altcoins. According to Motley Fool writer Sean Williams, this has more to do with creator Charles Lee taking a back seat in the development of the token. Recent developments suggest Lee is now ready to put his full weight behind the project.

“Litecoin certainly has what it takes to give bitcoin a run for its (virtual) money,” Williams said. “Recently, Litecoin completed the highly anticipated SegWit upgrade, which has been critical in improving the capacity of its blockchain, hastening settlement times, and reducing the costs to process transactions. Doing so should help attract businesses and, perhaps, investors.”

It didn’t take long for the Litecoin Foundation to temper expectations about the coin’s potential. In a Nov. 29 tweet, the Foundation said it doesn’t believe its cryptocurrency is the biggest competitor for bitcoin. It also reiterated its focus on transaction processing.

“Bitcoin and Litecoin will have different focuses. Litecoin will definitely focus more on payments,” the tweet said.

Despite vastly different market caps, bitcoin and Litecoin share many similarities. Both algorithms put a hard cap on the number of coins that can be created. They’re also much older than the latest wave of altcoins sweeping the market. Whereas bitcoin was created in 2009, Litecoin came on to the scene in 2011.

For a long time, LTC was the no. 2 cryptocurrency in terms of market value and overall trading volume. Despite slipping to the likes of Ethereum, Bitcoin Cash and Ripple XRP, Litecoin is still considered to be the silver to bitcoin’s gold.

Bitcoin prices spiked above $11,000 on Thursday for the first time in its history. Prices have since moderated back down to the mid $9,500 region.

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 money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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