GE is undervalued

Posted Dec 4th 2009 2:00PM by Joseph Lazzaro
Filed under: General Electric (GE), Stocks to Buy

As expected, General Electric (GE) is on the mend, it's stock price is reflecting that new reality, and it goes without saying that I'm reiterating my buy rating for the company, first recommended on June 2, 2009 at a price of $13.80. If you bought GE in June, you're up 25%.

Institutional investors are looking past GE's likely 12-15% revenue decline for 2009, to 2010. As of November, it appeared GE would be fortunate to register flat revenue for 2010, but look for that forecast to be revised upward: GE, a microcosm of the U.S. economy, is recovering. True, risk remains if an increase in loan default rates creates more hiccups at the recently-bolstered GE Capital Finance, but the calculation here is that the worst is behind GE Capital and the company's strong, diverse business lines will more than offset the finance's division's short-term negative contributions.

Increased industrial orders from emerging market giants China and Brazil should provide one tailwind; orders from the Middle East also should impress. U.S. government/state government spending on infrastructure will provide a second tailwind; the recovery of commercial aviation globally will provide the third. The bottom line: GE is undervalued.

The First Call FY2009/FY2010 EPS estimates for GE are 99 cents to 92 cents. That 92 cent fiscal 2010 EPS estimate will likely prove to be low.

Technically, General Electric's stock chart is strong – an uptrend, but with above average volatility. Hence, don't buy GE if you can't tolerate a 15% drop in the stock's price in a month. Also, GE will encounter psychological resistance at $20, but this should prove to be minor. GE is headed north.

Stock Analysis: General Electric is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% position in GE now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your GE position before February 2010. Sell/Stop Loss if you were to buy shares in this company: $9.25.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: GE

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Reader Comments (Page 1 of 1)

12-05-2009 @ 11:32AM

john piatkowski said...

Joe
Re: GE Could you explain sell/stop loss @ $9.25. Should I buy a put option or stop loss?

Great article Thanks

12-06-2009 @ 11:45AM

mikegentile said...

i just sold 5500 shares of ge it killed me i had for over 10 years @ 15.85 it then dropped to 14.25 since made a comeback with rest of large caps. the pe is too high and the risk of all the recent ge capital loans causing trouble for a few years is scary especially in uk ge cap expanded balance sheet in 05,06,07,and 08 at top of market lot of risk there also the loans were somewhat aggressive according to some people i would rather buy a straight bank its the same risk better upside more earnings per share potential. i am considering buying calls if price drops they are selling everything in order to cover l likely loan losses the ge i used to know would have had cash going into this crisis buying up everything