How to Trade – General Electric Company (NYSE:GE)

How to Trade – General Electric Company (NYSE:GE) 23.66

Since there are a lot of articles about what to buy and sell out there, I wanted to share how I think before I place an investment. Today’s example is going to be how to trade General Electric.

General Electric Company (NYSE:GE)

How to Trade – Step 1 – Summary

The most important thing before making an investment is to know what does the company really do.

General Electric Company provides services ranging from aircraft engines, power generation, water processing & household appliances to medical imaging, business & consumer financing, media content & industrial products.

Once you have established what the company does and you believe in their business, you have to look at the quick facts;

[checklist]

• Market Cap (Market Capitalization) which tells you the size of the company. Most of the time, larger companies are more stable than small companies.
• P/E (Price to earnings ratio) tells you what the current price is per dollar earned by the company. It’s a quick and dirty way to see if the company is over or undervalued.
• EPS (earnings per share) is how much profit per share the company made and ttm (trailing twelve months) means that it’s during the last 12 months. The EPS is usually what all the analysts are talking about before an earnings report, also know as the bottom line.
• Div & Yield (Dividend & Yield) for those of you who like a steady revenue stream, the Div & Yield is important as it tells you how much the company pays out in cash dividend to its share holders.[/checklist]

As you can see, GE is a large company, decent PE, and good dividend (you’ll annually receive $3.2 per each $100 you park in GE, and it usually increase every year) which is much higher than you’re regular savings account.

How to Trade – Step 2 – Price Target

In today’s information world, it’s easy to find price targets for companies set by analysts. Why should you have to do all of the heavy lifting yourself, if some brilliant people has already spent tons of time doing it for you? The key to remember is that this is just a guideline, as you don’t know for what date and time these estimates were set for.

Here you can see that the mean target price is higher than the current price and the low target price isn’t that far off the current price. This indicates that there is a potential upside with a smaller downside. In other words; good indication.

How to Trade – Step 3 – Downgrades and upgrades

It’s always good to see what the latest rating is and what the price was back then.

A buy is a good sign, but equally important is the action. Here it was “Initiated”, a downgrade will push down the stock conversely to an upgrade that will push the price up.

How to Trade – Step 4 – Returns

Is the company generating any returns on all the money that people have invested in it?

Return on Assets (ttm): shows how much money are the company is making on all the assets they have. Return on Equity (ttm): shows how much money they make on the shareholders’ capital. Quarterly Revenue Growth (yoy): Shows you if the company is growing its sales. The ROA is decent for a company like GE with a lot of assets. The ROE is also decent given the maturity of GE. The revenue decline is a bit disappointing but not too much to be worried. The revenue growth is often reflected in the PE, if the growth is high then you have to pay more per dollar the company earns. In GE’s case we pay about $17.5 per dollars which is lower than the $19 per share that it normally lies around.

How to Trade – Step 5 – Profitability

If the markets goes sour, does the company have enough margins to still make a profit?

GE has good margins for being such a large company.

How to Trade – Step 6 – Future Opportunities

Here’s where you really have to do your own homework and read news articles about the company’s future. A good source is to read analysts reports after the company’s earnings call. Since GE is a conglomerate it’s hard to describe all the market opportunities but their Capital branch is going strong, reporting a planned dividend to GE of $6.5 Billion in 2013.

GE plans to return $18 billion cash to its shareholders in 2013, including repurchase of $10 billion of stock. This is a sign of strength and in an interview with Brian K. Langenberg, Founder of Langenberg & Company, LLC. He talks about more potential in the stock.

General Electric Company (GE) can potentially report $2.50 per share in an up cycle and deliver a 3%-plus dividend yield to patient investors looking for a significant return, says  “Based upon our own study of GE‘s earnings power, including analysis of the understated results going back over two decades, we believe the company can potentially report about $2.50 per share in a full-power generation up cycle, provided they execute.”

Currently GE trades around $23, yet with the potential to return to a peak $1.28 dividend with a 3% yield, the stock can move upward to $40, positioning GE to be a valuable upside pick for long-term investors.

This one will require patience — few power plants being built in the U.S. — getting out back office costs and integrating their deals, and patience-of-Job acceptance that they usually overpay for acquisitions. But you get a 3%-plus dividend yield to wait, and both GE Capital and the parent are underleveraged.

And of course, nothing in here should be taken as an investment advise,
 always do your homework first!