General Electric (NYSE:GE) stock fell modestly on Monday after UBS downgraded GE stock. This comes on the heels of Stephen Tusa at JPMorgan Chase (NYSE:JPM) reiterating his bearish $5 per share target on GE stock. It’s true that GE is facing issues at its Power and Aviation units and may have some self-inflicted wounds.
UBS lowered its price target on GE stock to $11.50, but that’s well above the current $10-plus per share level where GE stock currently trades. UBS believes that General Electric stock will “take a breather,” rather than fall to JPMorgan’s price target. Still, despite concerns, the speculative buy case on GE appears to still be valid.
UBS analyst Damian Karas cited a “notable decline in interest rates and ongoing power market weakness” as reasons for the downgrade of GE stock. However, Karas went on to say that he thinks the company is on the road to a “multi-year turnaround.”
GE Stock Remains Speculative
This downgrade highlights the point that CEO Larry Culp and General Electric stock bulls have pointed out: GE is in the midst of a multi-year turnaround. Investors should not expect GE stock to return to its $600 billion market cap. Nor should they expect it to regain its place on the Dow 30 anytime soon. The journey from the world’s largest market cap to the near-destruction of the company took years. By the same token, nobody can expect GE to recover overnight.
InvestorPlace columnist Vince Martin noted many of the setbacks GE has faced, including “confusion” about the growth of the orders received by its Power unit. Moreover, GE Aviation, often regarded as one of the company’s more stable divisions, has faced issues with its GE9X aircraft engine.
Further, the U.S.-China trade war and the possibility that toxic assets remain on the balance sheet of GE Capital remain on the minds of some investors. One only has to study the history of Pan American World Airways or Enron to know that once-respected large companies can disappear, so the owners of General Electric stock are facing considerable risk.
The UBS Downgrade Changes Almost Nothing
However, I do not think the buy case has changed for General Electric stock since the start of the year. It remains a speculative stock. I do not believe any of its known challenges will derail its recovery.
But investors do need to consider that GE has risen by around 38% since the start of the year, so a pause or pullback wouldn’t be very surprising.
Still, if GE does recover, the owners of General Electric stock would make a great deal of money. As a result, speculating on GE stock could be worthwhile. As recently as two and a half years ago, GE traded at triple the price at which it stands today. Moreover, analysts, on average, expect the company’s earnings to resume rising in fiscal 2020. They also believe that its profit will increase at least 10% annually from fiscal 2020 through 2022. Assuming the company can maintain that growth rate for the foreseeable future, the price of General Electric stock would probably rise meaningfully.
GE Stock Remains a Speculative Buy
Amid the news, I still see GE stock as a speculative buy. Neither the UBS downgrade nor the continued $5 per share price target from JPMorgan’s Tusa has brought GE stock down recently. Moreover, the forward price-earnings (PE) ratio of General Electric stock now stands at just above 14. I consider that a low multiple for a company that looks set to experience double-digit-percentage profit growth.
GE could fall significantly if the worst fears about it come true or if the major indexes enter a bear market. However, as long as GE’s profit rebounds and its setbacks seem manageable, General Electric stock still looks to be on the path to recovery.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.