Editor’s Note: We are providing an equity trade for conservative investors and an options trade for aggressive traders.

EQUITY TRADE INSTRUCTIONS

Symbol: GE (NYSE)
Limit: Buy below $13
Holding Period: 5 months
Target Price: $15
Target Gain: 15%

OPTIONS TRADE INSTRUCTIONS

Symbol: GE190315C00012000
Limit: Buy the Call option below $1.50
Strike Price: $12
Expiration Date: March 15, 2019
Target Gain: 100%

COMPANY DESCRIPTION                     

General Electric Company operates as a digital industrial company worldwide. It operates through Power, Renewable Energy, Oil & Gas, Aviation, Healthcare, Transportation, Lighting, and Capital segments. General Electric Company was founded in 1892 and is headquartered in Boston, Massachusetts. Link to company website.

TRADE RATIONALE       

If you just returned from a two-week vacation without checking the news, you might wonder why I’m finally jumping in on the GE turnaround story. The stock has been in freefall for the past year, losing half its value as the company continually came up short of analyst’s modest expectations.

All that changed a few days ago when GE’s board of directors fired its CEO on October 1 and replaced him with Larry Culp, an outsider that Wall Street believes can turn the company around. That action was taken after a customer of GE’s power division had to shut down one of its plants due to a defective part, causing its share price to fall below $12.

After that latest embarrassment, the board swiftly took action. In addition to replacing the CEO, the company also announced that it would take a $23 billion write off against its power division and acknowledged that it would not meet its guidance for per share earnings for 2018.

By the end of that day, GE was trading back above $12 and closed yesterday at $12.66. That is precisely the same as its closing price on September 18, before everything started to go sideways.   

The big difference between now and two weeks ago is investors’ perception of the company. The question of what it would take before GE finally took drastic action has been answered emphatically. Now, the question is how soon before Mr. Culp will be able to start posting measurable results.

At the moment, GE earns a perfect score of 10 from my IDEAL Stock Rating System as a result of its strong operating cash flow, low forward P/E ratio, and high dividend yield. There’s a decent chance that dividend may be temporarily suspended by Mr. Culp until he has the company back on a growth curve, but in this case that may actually push the stock higher.

To be sure, there will be more blood-letting out of GE. But I don’t see its share price dropping below $12 barring another massive write-off which at this point seems unlikely. More likely is a plan announced to dispose of non-core assets, which could quickly push the share price above $15.

The math behind this call option recommendation is pretty simple. Buy the $12 strike price for no more than $1.50. If the share price gets back to $15 within the next five months then that option would have $3 of intrinsic value for a nifty gain of 100%.