General Electric is back.
The stock inched above $30 on Tuesday, a level not seen since 2008. Many investors thought $30 might be too high a hurdle for a company that is so large as to almost defy management.
But GE’s (ticker: GE ge 2.2908366533864544% General Electric Co. U.S.: NYSE USD30.81 0.69 2.2908366533864544% /Date(1447275311224-0600)/ Volume (Delayed 15m) : 149294493 P/E Ratio 925.6024096385543 Market Cap 304490324343.387 Dividend Yield 2.9938171168239505% Rev. per Employee 455472 More quote details and news » ge in Your Value Your Change Short position ) plan to simplify operations and rid itself of GE Capital, once the corporate profit-engine, is prompting investors to bullishly rerate one of the world’s most widely held stocks. The new GE is focusing on making things the world needs, rather than lending money.
Now, after GE posted strong third-quarter earnings, the stock is priced like a coiled spring in the options market. GE’s stock will move (on average) 1.5% each day over the next month if the options market is right – and the put and call market has largely been about GE over the past year.
To pre-position, investors can sell GE’s February puts and buy calls to gain exposure to several key events.
The risk-reversal strategy – selling a put with a strike price below the stock price and buying a call with a strike price above the stock price – expresses a view that GE is likely to keep rising. If shares fall, investors should buy the stock. If it keeps rising, the long call will increase in value.
With GE at $30.45, investors can sell the February $28 put for 56 cents, and buy the February $31 call. The position cost 35 cents and exposes investors to several events that could move the stock higher through January. If the stock hits $37, the position would be worth $5.56.
GE is hosting its annual investor meeting on Dec. 16. CEO Jeff Immelt is expected to unveil the company’s 2016 financial guidance. On Jan. 22, GE reports fourth-quarter earnings.
Meanwhile, GE is expected to ask the Federal Reserve in January to remove the Systemically Important Financial Institution designation that was applied after the financial crisis because of GE Capital. The so-called SIFI designation, which is a common feature of bank stocks, essentially requires GE to ask the U.S. government for permission to raise dividends and buy back stock.
Scott R. Davis, a Barclays analyst whose work on GE has figured heavily into our bullish stance, raised GE’s price target to $32 after third-quarter earnings. He is telling clients to overweight GE’s stock as it simplifies operations and sells off assets. GE has sold about $100 billion in assets just this year.
“Continued execution here is key for stock outperformance, and if we see any risk to our bullish thesis, it is that capital market conditions erode and impede GE Capital asset sales,” Davis recently advised clients.
Should GE continue to execute without difficulty, Davis sees the stock hitting $37 or 18 times his 2017 earnings estimate of $2.09 a share.
We have advised investors to bullishly trade GE for more than a year. The restructuring was the main allure, a point reinforced by GE’s options trading patterns even as the market remained skeptical. The disconnect created the opportunity to pre-position for significant gains at a time when GE was widely mistrusted.
Back in September 2014, near the apex of skepticism, we recommended buying GE’s January $27 call for $1.29. The call is now trading around $3.40. Investors can sell the call to lock in a 164% profit. Some may be tempted to hold the call until expiration, but that goes against sound trading discipline. Gains of more than 100% are rare. When they happen, take them.
This discipline is valid even though it seems that GE’s previous resistance of $30 is now support. If the stock dips below $30, consider buying into the weakness, provided the investment thesis enunciated here is still intact.
GE may never captivate investors like Apple ( AAPL aapl -0.00856384345294168% Apple Inc. U.S.: Nasdaq USD116.76 -0.01 -0.00856384345294168% /Date(1447275309415-0600)/ Volume (Delayed 15m) : 36704012 P/E Ratio 12.714130434782609 Market Cap 651031388539.843 Dividend Yield 1.7782337351457638% Rev. per Employee 2102570 More quote details and news » aapl in Your Value Your Change Short position ) or Amazon ( AMZN amzn 2.050994421537715% Amazon.com Inc. U.S.: Nasdaq USD673.21 13.53 2.050994421537715% /Date(1447275304634-0600)/ Volume (Delayed 15m) : 3840031 P/E Ratio 976.2173913043479 Market Cap 309232908378.208 Dividend Yield N/A Rev. per Employee 652745 More quote details and news » amzn in Your Value Your Change Short position ), but it seems investors are begrudgingly conceding that GE offers more than just a reliable dividend yield, which, at 3.7%, handily exceeds that of the 10-year Treasury bond.