Underweight rating and EU investigation turn GE bearish

In the last week of April, diversified industrial giant General Electric (NYSE: GE) reported a swing to profit on a non-GAAP basis in the first-quarter of 2017, compared to a non-GAAP net loss in the similar period last year.

However, the stock hardly moved upwards due to its exposure in the oil and gas sector. In fact, the stock continued to slide and hit a new yearly low of $25.98 last week. We anticipate the downtrend to continue due to reasons mentioned below.

There are three main reasons for the turbine manufacturer to turn bearish. Firstly, the company has slashed its dividends in the past one year. That could have negatively impacted investor confidence in the stock.

Secondly, GE reported a worse than anticipated negative cash flow in the first-quarter. Thirdly, low crude prices continue to impact GE’s margins.

GE Power

Highlighting a mountain of difficulties, the 133 page detailed report from JP Morgan pointed out that the incoming CEO John Flannery could take multiple actions, including restructuring and rearrangement of portfolio priorities, to bring the company back to a growth path. Still, analysts at JP Morgan believe that Flannery would have a tough time in resolving challenges quickly due to fundamental weakness and weak growth outlook.

On that basis, JP Morgan has reaffirmed its underweight rating for GE with a 12-month price target of $22. The analysts also stated that they do not believe that the future growth potential would act as a catalyst for the share price.

In another development, the European Union’s antitrust regulatory authorities have accused GE of breaching the merger rules of the bloc. The EU regulators stated that they believe GE did not provide clear information while reviewing the latter’s $1.65 billion merger deal with LM Wind Power. The officials have given an unconditional approval to GE’s merger transaction in March. However, GE can be fined up to 1% of its worldwide revenue, if the allegations are found true in the investigation. Thus, considering the reaffirmation of rating downgrade by JP Morgan and investigation over breach of merger rules, fundamentally, the stock is forecasted to remain bearish.

As indicated by the image below, the stock has broken the major support at 27.20. The next technical support for the stock is at 24.10. Furthermore, the momentum indicator is descending with a reading below 100. Thus, we can expect the stock to depreciate further.

In anticipation of a decline in the share price, we wish to purchase a low or below option when the stock trades near $26 in the NYSE. Before we make the purchase, we would like to make sure that the binary option is valid until July 20.

---