(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
General Electric Co. (GE) continues to fall, and the losses are staggering with the stock now down by more than 50% over the past 52 weeks. But even with the sharp declines already in place, the stock has more room to fall, based on a technical and options market analysis. In fact, shares could another 30%, to roughly $10.50, from the stock's current price around $14.80.
Even worse still for GE, analysts continue to cut their earnings and revenue targets for the company in 2018. An article published on Investopedia on Dec. 22. noted shares could fall to $11, based on valuation alone. But now the technicals and options markets are starting to come into agreement with that analysis. Additionally, the recent volatility in the stock market has sent anxiety levels for investors soaring, which could add additional pressure to shares, should that nervousness continue.
GE's stock has broken a key support level around $14.85 and the five-minute chart shows that what had been supporting the price has now turned into resistance. The stock has been unable to rise back above it.
Even worse is that with that support level now broken, GE's stock could continue to decline to nearly $10.50 from current levels. That would take the stock back to a price not seen since February 2009, when the market was first rising from the steep declines suffered during the financial crisis.
Options traders are pricing in steep declines as well, using the options set to expire on Sept. 21. The $14 strike price options suggest shares of GE could rise or fall by roughly 20% by expiration. The cost of buying one put and one call is about $2.76 each, and that puts the stock in a trading range between $11.25 and $16.76. But making matters worse is that puts outnumber calls 21 to 1. There is open interest in nearly 21,000 puts with only about 1,000 call contracts. The puts hold a notional value of approximately $2 million, not a big wager. But it is at the $15 strike price where the massive bets lie, with nearly 69,000 puts on the open interest to roughly 4,000 calls. The notional value of the puts contracts is more than $10 million. With the options trading at approximately $1.50, shares of GE would need to fall to $13.5 just for the options to break even. (For more, see also: The Rise and Fall of General Electric.)
Fundamentals Continue to Deteriorate
But as if that wasn't enough, analysts continue to slash their earnings and revenue estimates for GE. Just in the last 30 days, analysts have cut their earnings estimates for 2018 by 5% to $0.97. Also, they are now projecting revenue to decline to $115.53 billion in 2020, from $122.4 billion in 2018, a drop of nearly 6% according to Ycharts.
GE looks like it has its work cut out for it over the next few years trying to right what could be a sinking ship.
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.