What to do with General Electric (NYSE:GE) shares? The stock had a highly volatile 2020, slumping to April and then soaring more than 73% from October only to end the year down just 3.2%. So what can investors expect in 2021, and is the stock still worth buying?

The case for buying General Electric stock

Here's a summary of the investment case for the stock. Investors in GE are hoping that the company's free cash flow (FCF) will improve dramatically over the next few years. The improvement will come from a combination of a recovering commercial aviation market and ongoing strength in military aviation leading to a multiyear recovery at GE Aviation.

Passengers on an airplane.

General Electric needs commercial air traffic to come back. Image source: Getty Images.

GE Health Care will continue to generate low-to-mid-single-digit growth and generate over $1.2 billion in FCF over the medium term, led by its world-class imaging scanners. Meanwhile, CEO Larry Culp is expected to use his operational expertise to engineer margin improvements at GE Power and GE Renewable Energy -- not least by cutting costs and working through unfavorable legacy contracts. In addition, Culp is streamlining the organization and aggressively cutting corporate costs.

How General Electric could be valued

Wall Street analysts expect these combinations of events will result in a turnaround in FCF from an outflow of around $1.2 billion in 2020 to FCF of $2.8 billion in 2021 and then $4.6 billion in 2022. To put the last figure into context, it would mean GE trades at around 22 times its FCF in 2022 (assuming the market cap stays the same).

That would be a good valuation for the company when you consider that most aviation observers don't think passenger traffic will get back to 2019 levels until 2023 or 2024 -- in other words, GE Aviation should continue to be in catch-up growth mode for a couple of years after 2022, while GE Renewable Energy is expected to start generating FCF in 2022 at the earliest, with GE Power possibly coming a year earlier.

A gas turbine.

A gas turbine. Image source: Getty Images.

All told, there's a powerful case that GE is a good long-term value, and a few months ago the stock looked like a very good value on a risk/reward basis.

What about now?

The share price has appreciated a lot, so it's fair to say that GE is not as attractive as it once was. Simply put, the potential reward has gone down, but many of the risks remain. There are five main talking points. 

First, there's no guarantee that commercial aviation markets will play out as expected, and there's also the possibility that GE's highly lucrative engine aftermarket sales will suffer an extended period of weakness due to a glut of engine replacement parts on the market.

Second, while Culp appears to have room to cut costs at GE Power -- the market for gas turbines remains in overcapacity -- the question is, what next? Given the rise of renewable energy, it's hard to see the gas turbine market growing at more than a low-single-digit pace if that.

Third, the renewable energy market remains fiercely competitive between peers Vestas, Siemens Gamesa, and GE. Any one of them may find it difficult to win new contracts if it tries to secure higher-margin work.

Wind turbines

Image source: Getty Images.

Fourth, investors always need to consider the headline risk of the economy -- something industrial investors know all about. Furthermore, consider that GE's FCF will not turn into something approaching an acceptable figure for a few years yet.

Fifth, even if you do believe GE will get some help from end markets in the future, there are plenty of other stocks that you could buy on cheaper valuations, but with the same headline risk.

Is GE stock a buy?

On balance, and given a choice between buying and selling, I think GE is a buy. However, that doesn't mean you should buy the stock. As noted above, there are plenty of other stocks that look like better values on a risk-adjusted basis. For example, Raytheon Technologies in aviation and Carrier in the industrial sector at large.

All told, GE still is a useful investment option, and it looks slightly undervalued, but not by that much. GE stock is still a buy; just don't expect the kind of returns generated on the stock in the last six months to be repeated in the near future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.