This is the time of year when major corporations issue their third quarter earnings and for some it can be like an early Christmas with all the smiling faces and anticipation of dollar signs dancing in their heads. For others, not so much. It’s more of the same, with just a few lumps of coal in a plain brown paper bag. GE has been heading for the drain for about a year now and it looks like there’s more bad news coming soon. It may be time to rethink your positions in GE.
General Electric’s new CEO John Flannery did not pull any punches when delivering the company’s 3rd quarter results recently. Flannery stated the following on the conference call:
While the company has many area of strength, it’s also clear from our current results that we need to make some major changes, with urgency and a depth of purpose. Our results are unacceptable to say the least… Everything is on the table and there have been no sacred cow.”
General Electric’s earnings were a disaster. The game of whack-a-mole continued. Strong performance in a majority of segments was more than offset by poor results in the Power, and Oil & Gas segments.
The stock immediately began to plunge. The selloff was violent and abrupt. Nonetheless, by the end of the day, the stock made it all back and then some ending the day in the green. Even so, I chose to sell out of my position at the $23-mark. Here is why.
The rebound was most likely short covering
Even though it appeared the selloff was the final capitulation in the stock, with investors swooping in to buy at bargain basement prices, it could not have been the case. The reason is Flannery left too much unsaid on the earnings call. Too many major issues remained unanswered. These unanswered questions regarding the dividend, potential divestitures, and 2018 guidance are to be answered at the November 13th reset meeting. On a side note, the more I have thought about the timing of the November 13th meeting, the more I believe it was a huge mistake. Flannery should have just laid out the entire plan at the earnings call. Now, the stock is sliding downward on the daily basis due to the fact no one has any idea what is about to happen. I have no idea what General Electric is going to do as well with the exception of one item. The dividend is going to be cut, for sure.
The dividend will be cut
The dividend is going to be cut. By how much I do not know. Yet, based on what Flannery stated, and counterintuitively did not state regarding the dividend, I am 100% positive the dividend will be cut and realigned with 2018 guidance. The more important point is what will occur to the stock price in the aftermath of the cut. One of the first rules of investing I learned from my investing mentor Joe Terranova of CNBC is sometimes it is best to get to the sidelines.
Hurricane Katrina lesson learned
In Terranova’s groundbreaking book, “Buy High, Sell Higher,” he makes the case that when you have limited visibility regarding a future event that could have drastic consequences regarding your investment capital, it’s not about making money, it’s about preserving capital. Terranova states regarding the Katrina hurricane:
The professionals understand that at times like Katrina, it’s not about making money; it’s about preserving capital. The goal was to reduce our risk – to manage our risk first – which is what the vast amount of investors don’t understand. Manage your risk first, and you are sure to come back and fight another day. The is the number one priority with something as big as Katrina, or even with something as small as a quarterly earnings report from a company in which you own the stock.”
I feel this statement definitely applies to the current state of affairs for General Electric. I was surprised by the depth of the issues at the company. I thought Immelt’s known blunders were bad enough, yet Flannery’s commentary on the company was a huge eye-opener. When the stock was down 8% after earnings, I was holding on. I have learned over time that selling out as the stock is cratering is more often than not a bad idea. Many times I used this opportunity as a chance to improve my basis by doubling down. Nonetheless, I could not do that this time due to the fact so many questions remained unanswered. Hence, the reason why I think performing the reset weeks after earnings was a bad idea. Furthermore, based on Flannery’s comments, I was sure a dividend cut was on the table.
The Bottom Line
Sometimes the best thing to do is get to the sidelines so you can live to fight another day. I have been bullish on General Electric since the stock was trading at $16. So when the stock recovered from the drastic drop post-earnings, I saw this as an opportunity to preserve and protect the capital I have invested in General Electric. Each individual investor has to make their own decisions based on their own particular circumstances. I never in my wildest dreams believed the situation was so bad the company would consider cutting the dividend. Yet, after listening to Flannery speak on the conference call, I am 100% sure a dividend cut is on the way. I am happy to wait and see how things turn out. If the event turns out to be a positive for the stock and the stock rebounds, I may consider buying back in after taking time to consider what exactly was presented. Many say that the dividend cut must be priced in at this point due to the precipitous drop in the stock since earnings were announced. I don’t think so. Those that are stating you should buy ahead of the November 13th reset may be correct, yet they are not investing, they are gambling. That is something I don’t do. I have no idea at this time regarding how much the dividend will be cut, what businesses the company may divest, or what Flannery will say regarding 2018 guidance. Therefore, I cannot in good conscience put my capital at risk. Those are my thoughts on the matter. I look forward to reading yours. Please use this information as a starting point for your due diligence and consult an investment adviser prior to making any investment decisions.