Tag Archives: GE

GE Brings Good Things To Short-Sellers

GE hit $8 in 2008. If you short the stock with some patience, this stock is, in my opinion, a low-risk bet that it will at least drop 50% over the next 12-18 months. – January 29, 2017 issue of  Short Seller’s Journal

General Electric has been a no-brain’er short this year.  I recommended it as short on January 29th.    The “legendary” Jack Welch practically invented corporate financial engineering and  accounting manipulation as we know it today (sorry if you are under 35 managing money and don’t know who Jack Welch or what accounting manipulation is).

So imagine my shock when GE has been reporting earnings “misses” for several quarters, including the most recent.  GE must be the only company in the S&P 500 that can’t seem to beat Wall Street’s quarterly ritual of essentially laying an earnings “bar” on the ground over which companies “proudly” step each quarter.  On the other hand, it’s likely an indicator of just how bad the real  numbers are at GE.  I guess Welch’s legacy is finally haunting the Company.  And for Halloween investors might be getting a dividend cut in their “treat bag” from GE.

Back at the end of January I said this in the Short Seller’s Journal:

For it’s latest quarter, operating earnings dropped year over year despite a slight year over year increase in revenues for the quarter. It’s operating earnings also dropped for the first nine months of 2016 vs. same period in 2015. For the first 9 months of 2016, GE’s operations burned cash, although they’ll attribute that to “discontinued” operations, which burned $5.3 billion for the period.

Companies often classify money-losing businesses as “discontinued” with the intent to sell them. But until the disco’d businesses are sold, GE has to live with them. This is yet another earnings management technique, as GE can then separate out the “discontinued” business numbers from the “continuing operations” for as long as GE still controls the disco’d businesses. This enables GE to present an earnings number that does not include the losses associated with the disco’d businesses. It thereby enables GE to present a managed “GAAP” earnings metric that is significantly higher than the true earnings of GE’s operations.

GE reported its Q4 earnings on January 20th. It has not filed a 10Q yet but it “met” earnings expectations and missed sales. The oil-related business is one of the heavy weights on GE’s operations. Despite “meeting” estimates and a rosy analyst spin on the earnings report, the stock dropped 4.7% over the next two days, diverging very negatively from the Dow, which moved higher, up and over 20k.

You can see from the chart on the previous page that GE plunged below its 50 and 200 dma’s and failed to trade back up to the 200 dma while the Dow was hitting 20,000. This is a very bearish chart and it looks like big funds are dumping their shares. This is a more “conservative” short-sell play but the stock could easily drop 50% over the next 12-18 months.

Wall Street has finally begun to downgrade its earnings forecasts and stock price targets on GE.  I guess better late than never but anyone who listened to Wall Street in January expecting GE to be at $40 now is having a hard time sitting down without pain.

On the other hand, GE brings good things to short-sellers.  There’s stocks that are falling out of bed every day.  In the latest issue released yesterday, I presented a home construction supply company who’s stock has gone parabolic that, based on the fundamentals, is more of a lay-up short than GE seemed back in January.  You find out more about the Short Seller’s Journal by clicking here:  Short Seller’s Journal info.

This was emailed to me yesterday from a subscriber: “Sometimes I grow weary about short selling in this market, and then you come up with one good one, that shows me it really can fall down. I almost gave up on FCAU [SSJ’s recommendation to short Fiat Chrysler in the Sept 24th issue], but did not. Keep up the good work!”

TSLA Down 19% – $72 – In Eight Days

In my opinion, the ride down will be worth the pain and blood-loss of sticking with a short bet on TSLA, which is why I continue to buy small quantities of put options that have been expiring worthless. I know at some point I’m going to catch a $100+ reversal in TSLA stock which will more than make-up for the small losses I’m enduring in the puts while I wait for that occurrence. Using puts protects me from the unknown magnitude of upside risk from shorting the stock. Plus, I don’t have make a “stop-loss” decision because I don’t have the theoretic “infinite upside” loss potential that I would face shorting the stock. With my loss capped, I can hang on to the puts through expiration. With a stock like TSLA, often a stop-loss exit is followed up by reversal to the downside, leaving the short-seller without a short position.

As we saw on Friday, TSLA stock can reverse to the downside quite abruptly and sharply. I can guarantee that some number of shorts covered as TSLA was soaring over $370, leaving them with no position when the stock reversed, closing at $357. I don’t want to recommend specific puts to use but I can recommend giving yourself at least four weeks of time. If I were putting on a new put position today, I would probably buy a very small quantity of the July 7th $340-strikes. If TSLA sells back to the $310 area before expiry, which could easily happen as $310 is where the last 2-week push up in price began, the puts would have an intrinsic value of $30. The current cost is about $10.

TSLA reminds me of Commerce One (CMRC), a B2B internet company that went from $10 to $600 in a very short period of time in late 1999 – 2000. It eventually went to $0. I shorted and covered small quantities of stock starting around $450. I was fortunate to have been short from the high $500’s when it finally topped out a $600. The volatility of this stock was extraordinary but persistence and “thick skin” paid off.

The above commentary is from the Short Seller’s Journal. Subscribers who liked the idea have been short TSLA June June 12th, when the stock opened at $359. You can’t time the top or bottom with a stock like TSLA, but you can make a lot of money if you get 2/3’s of the ride down. You can learn more about the Short Seller’s Journal here:  LINK

YTD General Electric has been one of the 3 worst performing Dow stocks.  I presented GE as a short idea In the January 29th issue.  I said it would be a boring but no-brainer short.  So far it’s down 17.5% from that issue.  This has more than doubled the return on an SPX long position in the same time period.  Maybe it’s not so boring…