Reasons to Sell GE Today

Should you sell General Electric (NYSE: GE  ) today?

The decision to sell a stock you've researched and followed for months or years is never easy. But if you fall in love with your stock holdings, you risk becoming vulnerable to confirmation bias -- listening only to information that supports your theories, and rejecting any contradictions.

In 2004, longtime Fool Bill Mann called confirmation bias one of the most dangerous components of investing. This warning has helped my own investing throughout the Great Recession. Now I want to help you identify potential sell signs on popular stocks within our 4-million-strong Fool.com community.

Today I'm laser-focused on GE, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, GE has risen by 1.8% versus an S&P 500 return of 11.3%.  Investors in GE are no doubt disappointed with their returns, but is now the time to cut and run? Not necessarily. Short-term underperformance alone is not a sell sign. The market may be missing the critical element of your GE investing thesis. For historical context, let’s compare GE's recent price with its 52-week and five-year highs. I've also included a few other businesses in the same industry or a related one.

Company

Recent Price

52-Week High

5-Year High

GE $16.25 $19.70 $42.20
United Technologies (NYSE: UTX  ) $71.23 $77.09 $82.50
3M (NYSE: MMM  ) $86.71 $90.52 $97.00
Honeywell International (NYSE: HON  ) $43.94 $48.63 $63.00

Source: Capital IQ, a division of Standard & Poor's.

As you can see, GE is down from its 52-week high. If you bought near the peak, now's the time to think back to why you bought it in the first place. If your reasons still hold true, you shouldn't sell based on this information alone.

Potential sell signs
First up, we'll get a rough idea of GE's valuation. I'm comparing GE's recent P/E ratio of 16.2 to where it's been over the past five years.  

Source: Capital IQ, a division of Standard & Poor's.

GE's P/E is lower than its five-year average, a possible indication that the stock is undervalued. A low P/E isn't always a good sign, since the market may be lowering its valuation of the company because of less attractive growth prospects. But it does indicate that, on a purely historical basis, GE looks cheap.

Now let's look at the gross-margin trend, which represents the amount of profit a company makes for each $1 in sales, after deducting all costs directly related to that sale. A deteriorating gross margin over time can indicate that competition has forced the company to lower prices, that it can't control costs, or that its whole industry faces tough times. Here's a look at GE's gross margin over the past five years.

Source: Capital IQ, a division of Standard & Poor's.

GE is clearly having issues maintaining its gross margin, which tends to dictate a company's overall profitability. Investors need to keep an eye on this troubling trend over the coming quarters.

Next, let's explore what other investors think about GE. We love the contrarian view here at Fool.com, but we don't mind cheating off our neighbors every once in a while. For this portion of our research, we'll examine two metrics: Motley Fool CAPS ratings and short interest. The former tells us how Fool.com's 170,000-strong community of individual analysts rates the stock, and the latter shows what proportion of investors is betting that the stock will fall. I'm including other peer companies once again for context.

Company

CAPS Rating (out of 5)

Short Interest (Float)

GE 4 0.7
United Technologies 4 0.9
3M 4 1.1
Honeywell International 4 1.1

Source: Capital IQ, a division of Standard & Poor's.

The Fool community is rather bullish on GE. We typically like to see our stocks rated at four or five stars. Anything below that level is a less-than-bullish indicator. I highly recommend that you visit GE's stock-pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a mere 0.7%. A number like this typically indicates that few large institutional investors are betting against the stock.

Now let's study GE's debt situation, with a little help from the debt-to-equity ratio. This metric tells us how much debt the company's taken on, relative to its overall capital structure. 

Source: Capital IQ, a division of Standard & Poor's.

GE has taken on some additional debt over the past five years. With total equity basically unchanged over the same time period, debt-to-equity has consequently increased, as the chart shows. Based on the trend alone, that's a bad sign. I consider a debt-to-equity ratio below 50% to be healthy, though the number can vary by industry. GE is currently above this level, at 429.8%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If GE had to convert its current assets to cash in one year, how many times over could the company cover its liabilities? As of the last filing, GE has a current ratio of 2.89. That's a healthy sign. I like to see companies with current ratios greater than 1.5.

Finally, it’s highly beneficial to determine whether GE belongs in your portfolio -- and to know how many similar businesses already occupy your stable of investments. If you haven't already, be sure to put your tickers into Fool.com's free portfolio tracker, My Watchlist. You can get started right away by adding GE.

The final recap

GE has failed only two of the quick tests that would make it a sell. Does that mean you should hold your GE shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

Remember to add GE to My Watchlist to help you keep track of all our coverage of the company on Fool.com.

What companies would you like me to cover next in this series? Please leave your comments below.

Jeremy Phillips owns no shares of the companies mentioned. 3M is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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