The Future of General Electric: The Red or Blue Pill?

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GE.)

In the hit 1999 science fiction movie "The Matrix," the protagonist Neo had to choose between taking the red pill or the blue pill. With the blue pill, Neo would remain in ignorant bliss. But if he took the red pill, Neo would learn the ugly truth about his existence. Investors in General Electric Co. (GE) are being asked to make that same decision as new CEO John Flannery takes the reins.  

If you have been a long-term investor in General Electric the last few years, you have to be disappointed. GE shares have significantly underperformed the broader S&P 500. Even when adjusted for dividends, the stock's total returns have been disappointing. In fact, there has been nothing beneficial about owning GE shares.

GE Total Return Price data by YCharts

With a new CEO on board, investors are wondering what the stock's prospects will be over the coming years. Which direction will the company go? Will General Electric be looking to shed assets and change direction? Or will it stay on its current course? These are fundamental and important questions because ultimately it will dictate the direction of the stock. 

We speculated in June that GE shares could rise by nearly 30 percent, to around $36. But with a new CEO, and the company's middling recent quarterly results, one wonders what to do with the shares. It's certainly not what had been anticipated less than two months ago. (See: GE's Result: Cloudy With A Mix Of Uncertainty.)

The biggest risk from an investor standpoint right now is what GE will do with its 2018 revenue and earnings estimates. Will new CEO John Flannery look to slash those estimates or maintain them? That is the risk. And if those projections get slashed and some significant changes are made, what will do that to the valuation of GE stock?

It also begs the question: What should an investor do with their GE stock? Stick with it, or get out? The market could be pricing in earnings risk currently, with the stock trading below $25, but the market may not be discounting enough. The stock has more downward pressures ahead of it. If the market is discounting too much, the stock could see a significant lift from current levels. 

All of these questions makes owning General Electric shares a risk at this point. Should investors have faith and stick with it, or abandon ship and move on to greener pastures?

Will it be the red or blue pill?

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.