Buy Alert: General Electric (GE)
Editor’s Note: We are providing an equity trade for conservative investors and an options trade for aggressive traders.
EQUITY TRADE INSTRUCTIONS
Symbol: GE (NYSE)
Limit: Buy below $13
Holding Period: 5 months
Target Price: $15
Target Gain: 15%
OPTIONS TRADE INSTRUCTIONS
Symbol: GE190315C00012000
Limit: Buy the Call option below $1.50
Strike Price: $12
Expiration Date: March 15, 2019
Target Gain: 100%
COMPANY DESCRIPTION
General Electric Company operates as a digital industrial company worldwide. It operates through Power, Renewable Energy, Oil & Gas, Aviation, Healthcare, Transportation, Lighting, and Capital segments. General Electric Company was founded in 1892 and is headquartered in Boston, Massachusetts. Link to company website.
TRADE RATIONALE
If you just returned from a two-week vacation without checking the news, you might wonder why I’m finally jumping in on the GE turnaround story. The stock has been in freefall for the past year, losing half its value as the company continually came up short of analyst’s modest expectations.
All that changed a few days ago when GE’s board of directors fired its CEO on October 1 and replaced him with Larry Culp, an outsider that Wall Street believes can turn the company around. That action was taken after a customer of GE’s power division had to shut down one of its plants due to a defective part, causing its share price to fall below $12.
After that latest embarrassment, the board swiftly took action. In addition to replacing the CEO, the company also announced that it would take a $23 billion write off against its power division and acknowledged that it would not meet its guidance for per share earnings for 2018.
By the end of that day, GE was trading back above $12 and closed yesterday at $12.66. That is precisely the same as its closing price on September 18, before everything started to go sideways.
The big difference between now and two weeks ago is investors’ perception of the company. The question of what it would take before GE finally took drastic action has been answered emphatically. Now, the question is how soon before Mr. Culp will be able to start posting measurable results.
At the moment, GE earns a perfect score of 10 from my IDEAL Stock Rating System as a result of its strong operating cash flow, low forward P/E ratio, and high dividend yield. There’s a decent chance that dividend may be temporarily suspended by Mr. Culp until he has the company back on a growth curve, but in this case that may actually push the stock higher.
To be sure, there will be more blood-letting out of GE. But I don’t see its share price dropping below $12 barring another massive write-off which at this point seems unlikely. More likely is a plan announced to dispose of non-core assets, which could quickly push the share price above $15.
The math behind this call option recommendation is pretty simple. Buy the $12 strike price for no more than $1.50. If the share price gets back to $15 within the next five months then that option would have $3 of intrinsic value for a nifty gain of 100%.
Stock Talk
Asjad Shamim
The call option price is at $1.7.
Will wait for it to come down.
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Roger Dehring
Don’t recall if it was from one of your partners at ID or if I did it on my own, Jim,
But I did a GE trade back on August 31. Sold OCT 13/11 credit put spread for $0.54. Then bought half a position of JAN/2020 13 calls for a -$1.63 debit. Net cost of each call was -$0.55. Hopefully, the puts will go away come October and I can generate some profit from selling calls over the next 15 months.
Jim Pearce
Hi Roger. I believe you are referring to the short put trade I did for Income Millionaire on that day: https://www.investingdaily.com/income-millionaire/alerts/43171/trade-alert-flipping-the-switch-on-general-electric-ge/. At that time, I felt confident that GE would be trading above $13 by October 19 but didn’t much upside potential beyond that. Of course, all that changed this week which is why I issued this more aggressive trade for Systematic Wealth.
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Maurice
Jim, New here, am I buying 1 option contract per every 100 share of GE?
Jim Pearce
Yes. One options contract equals 100 shares of the underlying security.
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Asjad Shamim
Did someone got in @ Recommended price?
Benny K
Not sure what time the alert was posted but by the time I was able to respond it exceeded the limit price. Will track to see if a buying opportunity presents itself.
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Robert N
GE Mar 12 Call filled this morning at $1.50.
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ETKTRIDE
GE – filled @ $1.50 ND (IB)
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Benny K
Hi Jim,
Just curious as to why GE hasn’t shown up in your portfolio yet.
Jim Pearce
That trade did not fill until this week while I have been away on vacation. I will update the portfolio when I get back into the office on Monday.
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Dan
So this appears to be moving against us. I filled at 1.23, well below the 1.50 recommended and I’ve lost 2/3rds of the position so far. The dividend cut didn’t help us today. Do we really think this is coming back? Is it time to exit to cut losses?
Jim Pearce
A lot of things can happen between now and March 15, most of them good since the company has decided to get all of the bad stuff out in the open now. However, the expansion of the SEC inquiry into accounting treatment of the power division is a legitimate concern so I will be watching that closely. As for now, I will continue to hold this position.
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Jim Pearce
I’m expecting to see more announcements like this one in the weeks and months to come: https://finance.yahoo.com/news/ge-agrees-cut-stake-baker-131701291.html. GE up nearly 8% on the news today. If you have the stomach for it, you may want to consider buying the $8 LEAP that expires in January 2021 to average down the breakeven point for this trade (that’s what I did in my personal account).
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Benny K
Hi Jim,
Do you have a limit you could recommend on that LEAP. I’m currently in @ $.98 for the March $12 call and am trying to calculate my new BEP if I enter the LEAP.
Thanks
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Jim Pearce
I wouldn’t pay more than $2 for it. Last trade was at $1.70, and my guess is it can be bought for closer to $1.50 if we get a pullback after yesterday’s bounce.
Benny K
Schwab option chain is showing midpoint around $2.95 for 1/15/2021 $8 Call. Am I missing something?
Jim Pearce
No. The price I referenced was from a few days ago when I put my position on and GE dipped below $8. Yesterday’s pop in GE’s share price has pushed the bid/ask spread nearly a dollar higher. I wouldn’t chase it; there will soon be a day/week when the entire market takes a dive that will push everything back down temporarily.
Benny K
Thanks. Ill keep an eye on it.
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Asjad Shamim
HI Jim,
Do you recommend lowering down the GE price by buying additional?
Right now its almost all in the loss.
Jim Pearce
Hi Asjad. Please see this Stock Talk dialogue (above) for my thinking on averaging down on GE: https://www.investingdaily.com/systematic-wealth/alerts/43532/buy-alert-general-electric-ge/#comment-142594.
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Jim Pearce
This may be a case of “too little, too late”, but another announcement or two like this one over the next couple of months and we might make money on this option yet: https://www.bizjournals.com/chicago/news/2018/12/19/ge-closer-to-spinning-off-chicago-based-health.html?ana=yahoo&yptr=yahoo
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Jim Pearce
As a follow up to my update from last month (above). GE is up 10% this morning after releasing Q4 results that included optimistic guidance for 2019: https://finance.yahoo.com/m/4990464c-2e7f-328f-b1b7-dbab5689731d/ge-shares-rise-as-company.html. We’re still not back to breakeven on this trade, but GE’s momentum is clearly on the upswing, up nearly 50% since its intraday low on December 11.
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