General Electric’s (GE) Strange Days

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.”

General ElectricSo, 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.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.