I received an email yesterday from an investor who recently bought a stock on impulse. The stock did not fit his investment profile, he didn’t really know anything about the company, and he bought way too much of the stock. Then the share price plummeted. I walked him through a path toward unwinding his position in this inappropriate investment. Today, I’ll focus on your similar problem if you own shares of General Electric stock.
By now, you’ve probably heard the painful news from October 20 that General Electric (GE) is not doing well. Business is not thriving, cash flow has trickled to a slow drip, a significant dividend cut looms on the horizon, and the share price is threatening to continue dropping to a four-year low. You can read all about the problems at General Electric on a hundred different financial websites. I’m not here to itemize the drama. I’m here to tell you what to do with General Electric stock.
“But it’s General Electric. It’ll bounce back.”
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“They wouldn’t cut the dividend!”
“It’s a bargain at this price. I should buy more shares.”
NO, NO and HELL NO! This is your doctor speaking to you about a serious disease that carries a poor prognosis. Your stock doesn’t have the flu. Your stock doesn’t have a broken bone. Your stock has kidney failure! It is time to make difficult decisions so that this illness does not pervade the multi-year outlook for your investment portfolio’s success.
First, I’ll tell you why GE stock has not fit into my investment strategy at any time during the current decade, and then I’ll tell you how to surgically remove this cancer from your investment portfolio as painlessly as possible.
My investment strategy is simple to follow, and it’s outperformed the S&P 500 since I began keeping track of its performance in January 2012. When I look at a stock, I want to see current and next year’s earnings per share (EPS) growing 15% or more, a price/earnings ratio (P/E) that’s lower than the earnings growth rate, and relatively low debt levels. There are a few nuances to the strategy, of course, but that’s it in a nutshell.
General Electric Stock Lesson #1
Follow my very simple three-component stock investing strategy, and you will very likely experience attractive stock portfolio performance.
Here’s why GE shares never made the cut in my stock selections in recent years:
2010: Next year’s EPS growth was not strong enough.
2011: Next year’s EPS were projected to fall.
2012: Current and next year’s EPS were falling.
2013: Current year’s EPS were falling.
2014: Very slow EPS growth projected for 2014 and 2015; high debt levels.
2015: The stock was fully valued based on 2016 numbers; high debt levels.
2016: High debt levels.
2017: Very slow EPS growth projected for 2017 (later revised to falling EPS expectations), high P/E, high debt levels.
You might be thinking, “Crista’s standards are too high! I’ll never find a stock that fits with her strategy.” Relax. All of these companies have fit my strategy at various points during the current decade:
The key is that they are never buy-and-hold stocks; I only hold them for about six-to-18 months each. That’s because their situations eventually change. Maybe the company goes through a big merger and takes on more debt. Sometimes rapid EPS growth slows to a trickle. At other times, the stock rises enough that it becomes overvalued. Therefore, I monitor the numbers and price charts, and periodically sell the companies that no longer fit my investment strategy.
You should also be monitoring your investments, and removing the ones that don’t fit your investment strategy. By doing so, you will be far less likely to watch a stock crash and burn.
General Electric Stock Lesson #2
This very simple three-component investment strategy never would have allowed GE shares to occupy a place in your investment portfolio. Instead, you would have owned financially-healthy companies that were growing their profits, increasing the chances that you would have achieved capital gains.
Now it’s time to face the music. First of all, the worst is not over for GE shares. There’s a big investor meeting coming up in early November, and CEO John Flannery—who was hired to make the tough decisions that could turn the company around over the long-term—plans to announce more tough decisions; almost certainly to include slashing the dividend. My guess is that he’ll cut the dividend in half because the dividend is costing the company $8 billion per year, while current cash flow needs are monstrous. When Mr. Flannery quantifies the dividend cut, the stock could easily fall further.
General Electric Stock Lesson #3
When a scandal or crisis is occurring, there is always more bad news that emerges in the coming weeks and months. No matter whether it’s a government bribery scandal, the BP oil spill, Enron or Harvey Weinstein’s escapades, the bad news just keeps coming. Therefore, the worst is not over for GE stock.
Focus: you own shares in a company that has severely disappointed investors through corporate mismanagement, a falling share price and a pending dividend cut. There is no reason to own this stock!
You can rationalize all you want that the stock will eventually rebound, but who’s going to buy it? Dividend investors won’t buy it because the dividend yield will be small. Growth stock investors won’t buy it because the company is not growing. Value investors won’t buy it because the balance sheet seems to be wearing a Halloween costume! Institutional investors won’t buy it because there are many dozens of healthy companies to choose from. If they are desperate to find stocks to buy, rather than buy poor companies like GE, they will put their portfolio money in cash and wait for good stock opportunities to emerge.
General Electric Stock Lesson #4
Without buyers, your GE stock cannot rebound.
If you want the money that’s invested in your GE stock to grow, or to produce attractive monthly income, you must sell your GE shares and reinvest into stocks that have growing EPS and/or large dividend yields. It’s really as simple as that.
General Electric Stock Lesson #5
Sell your GE stock. Reinvest the capital into better stocks. Then periodically monitor the projected EPS growth, the P/E and the debt levels.
Only YOU can pull the trigger on a bad portfolio investment. I can help by providing you with excellent stock ideas through my weekly advisory, Cabot Undervalued Stocks Advisor. Please consider joining me.