(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
General Electric Co. (GE) shares have fallen by nearly 52 percent over the past 52 weeks versus an S&P 500 Index that has risen by 15.5 percent, a stark contrast. Just when you think the worst is over, the options market is suggesting there is more pain to come, indicating GE shares could fall 15 percent further, taking the stock to around $12.
Analysts sent a crushing blow to GE over the past week, with JP Morgan lowering its price target to $11 from $14. Last week, Deutsche Bank had predicted there was further downside risk to GE's book value. Instead of analysts outlooks improving as the company continues to restructure, the prospects appear to be growing increasingly grim.
The options market is just as pessimistic, making big bets that GE shares will fall to $12 or lower by expiration on January 18, 2019. The $13 strike price shows that the open interest for puts outweighs the calls, by nearly 7 to 1.
There are about 240,000 open put contracts. With the contracts trading at a price around $0.90 per contract, GE stock would need to fall 15 percent to $12.10 just to break even. The bet is not small, either, carrying a notional value of $23.76 million.
Bets Have Been Building
The bets grow even larger, with nearly 176,000 put contracts of open interest at the $15 strike price. With the contracts trading at a price of about $1.80, it would imply a notional value of approximately $32 million. Together, the $13 and $15 strike prices have a combined notional value of over $55 million – a massive wager.
Additionally, the bets in the $13 puts are relatively new, building since the start of 2018. Since February 26, open interest has climbed from about 130,000 contracts to 240,000 currently – a spike of nearly 85 percent. (See also: When Should I Sell A Put Option Vs A Call Option?)
Earnings estimates have been slashed substantially over the past 52 weeks, with little sign of abating. Analysts have cut 2018 and 2019 earnings estimates by more than 40 percent. Meanwhile, revenue growth will be non-existent over the next three years, with revenue forecast to grow to 126.3 billion in 2020, from $123.03 billion in 2018.
With the outlook for GE still dismal, it is easy to see why traders are so bearish on the stock. (See also: Sell GE on Trump Tariff Headwinds: Deutsche Bank.)
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.