Shares of General Electric Co. took a dive Monday, after the analyst that called the industrial conglomerate’s downfall, then helped mark a bottom in December, got back to being bearish, citing Wall Street’s overly optimistic view on free cash flow.
tumbled 7.1% to $9.30 on heavy volume in afternoon trade, enough to pace declines in its industrial peers and the S&P 500 index. The stock has fallen below its 50-day moving average, which many chart watchers view as a short-term trend tracker, to set a bearish technical tone for the first time since it rose above that line in early January.
Volume swelled to over 127 million shares within the first half hour of trading, enough to make the stock the most actively traded on the major U.S. exchanges.
Famed GE analyst Stephen Tusa cut his rating back to underweight, after upgrading it to neutral in December. He lowered his stock price target to $5, which was 46% below current levels, from $6.
Tusa made his name after the long-time bear correctly called GE’s downfall, then helped turn the tide with his upgrade on Dec. 13, citing a more balanced risk-versus-reward scenario.
With the stock soaring 55% since Tusa’s upgrade through Friday, he said analysts are “significantly over projecting” the recovery in free cash flow in the coming years. Over the same time, the SPDR Industrial Select Sector exchange-traded fund
had climbed 13% and the S&P 500 index
had gained 9.1%.
Tusa said that while he currently calculates free cash flow at zero, he believes GE’s power and renewables business will remain weak, the capital services business will likely continue to consume cash for the foreseeable future, the aviation businesses fundamentals are “weaker than meet the eye” and high leverage relative to its peers leaves the company vulnerable to liquidity issues.
He said his upgrade in December was driven by a recognition that sentiment had soured enough to appropriately reflect how challenging the situation at GE really is.
“We had expected a ‘reset,’ with the stock moving lower for a period of time, potentially an opportunity,” Tusa wrote in a note to clients. “What we got was another optimistic narrative, with enough positive to allow for the bull case to continue to run well head of a mathematically grounded view,” that came with guidance from GE that the company called a “reset,” though with a myriad of adjustments.
Since the end of 2018, the average rating of the 20 analysts surveyed by FactSet has increased to the equivalent of a buy rating from hold, while the price target has increased to $11.21 from $11.08, even though the 2019 earnings-per-share consensus has dropped to 57 cents from 81 cents and the revenue estimate has fallen to $116.0 billion from $119.3 billion.
GE stock breaks below 50-DMA, to snap a long streak in ‘technical limbo’
GE’s stock fell to a four-week low, but perhaps more importantly, dropped below its 50-day moving average (DMA), a widely watched indicator of the short-term technical outlook which extended to $9.87 on Monday, according to FactSet.
The stock is set to close below the 50-DMA for the first time since it closed above it on Jan. 7. Since then, the stock had been trading in “technical limbo,” as it was unable to close above its 200-DMA, which many view as a dividing line between longer-term uptrends and downtrends. In late February, the stock peeked above its 200-DMA in intraday trading a couple times, but the best it could do was close fractionally below it ($10.88 close versus 200-DMA of $10.884, according to FactSet) on Feb. 27.
On Monday, the 200-DMA came in at $10.38.
That 63-day streak of trading above its 50-DMA but below its 200-DMA was the longest since at least February 1979.