General Electric (GE) is up more than 11% today on news that the company’s credit rating was downgraded by S&P. This is yet another counterintuitive move for GE, as we reported just over a month ago (Stock Soars on Hint of a Dividend Cut, Huh?) that GE’s stock was soaring 15% after the CEO hinted that the dividend might be cut. We thought it quite strange at that point GE the stock would get such a boost from negative news. Near the end of February the dividend was in fact cut and the stock did actually drop to multi-year lows.
In this case, it seems that the credit rating downgrade is less than was expected dropping to AA-plus from AAA. CNBC’s Squawk on the Street reported on this just after the opening bell:
“As you already heard, after being downgraded by S&P on the credit rating you might wonder why is GE up? Lets take a good look at the statement, very carefully. S&P went out of their way to mention the stable outlook of GE. In the credit rating world, the phrase “stable outlook” is very important. A number of people down here circled that, pointing that out that’s one of the reasons we’re seeing the stock moving on the up side. GE immediately came out with a statement saying they’d provide details on GE Capital on March 19th.”
So, the fact that the downgrade was less than expected, and S&P said the AA-plus rating is stable was enough to spark a rally in GE shares. Never mind that GE will have to pay higher rates for financing; expectations were so bad for GE that even this is good news. We will be anxious to hear what GE tells the market about what is on the books at CE Capital a week from today. Again, expectations from the market are so bad that its possible that GE Capital could very well exceed the low expectations and get another nice pop. It is possible that the market is too negative on GE as a whole, and that is why shares rise on what would otherwise be bad news. We are reaffirming our Greatly Undervalued valuation on GE, but there is still a lot of risk in these shares. Again, we just cannot know how GE is doing until there is a little more clarity from GE Capital. Lets hope that some of the questions swirling around GE will be settled or more fully understood next week.