General Electric (NYSE:GE) stock has had quite the saga — the company has been in turnaround mode for over three years now.
GE has installed two different CEOs, sold off countless divisions, and made all sorts of strategic changes. It has also been through a variety of crises, both external and self-inflicted. Of course, this has made GE stock volatile, with plenty of ups and downs.
So, the latest blow probably didn’t come as much of a surprise to shareholders.
Last month, the Securities and Exchange Commission (SEC) took an additional step toward disciplinary action against General Electric. While the company has faced plenty of heat from short sellers and credit ratings agencies, government regulators are a newer hazard.
Still, GE stock has been able to come out relatively unscathed so far. Shares only fell for a few days, then quickly rebounded. And even in the wake of this added uncertainty, Goldman Sachs (NYSE:GS) came to GE’s side, giving the stock a favorable rating.
I’m inclined to agree. Despite GE’s many unresolved concerns, there is still a viable comeback story here.
SEC Slams GE Stock
Two weeks ago, the SEC made its regulatory plans regarding GE known. As a result, General Electric issued the following disclosure:
“On September 30, 2020, the SEC staff issued a “Wells notice” advising GE that it is considering recommending to the SEC that it bring a civil injunctive action against GE for possible violations of the securities laws. GE has been informed that the issues the SEC staff may recommend that the SEC pursue relate to the historical premium deficiency testing for GE Capital’s run-off insurance operations, as well as GE’s disclosures relating to such run-off insurance operations.”
I’ve seen people overreacting to this, so let’s put it in context. A Wells notice doesn’t necessarily mean that the SEC has decided to bring enforcement actions against the company — instead it notifies them of the possibility. As GE notes in its press release, this is not a formal notice of wrongdoing or allegations of such. Further, GE will have a chance to present its case to the SEC before it brings official action against the company.
That noted, this is still unequivocally bad news for GE stock. The SEC runs tons of background investigations on companies. It rarely gets to this step — particularly on a company as large and important as GE. This is even the case in the wake of controversies. For example, the SEC took a fairly light touch with Tesla (NASDAQ:TSLA) — Elon Musk got to keep his position as CEO, and a $40 million fine is little more than a slap on the wrist in this context.
Meanwhile, GE appears like it may get raked over the coals for events that happened back in 2018 and earlier.
Goldman Sachs Stands Up
It’s not all bad news for General Electric though, despite the government investigation. Goldman Sachs has re-entered the playing field on GE.
The famed investment bank had previously stopped coverage of General Electric in 2019, as it was advising that company on potential mergers and acquisitions (M&A) activity. In 2019, when it dropped coverage, it merely held a “neutral” rating on GE stock.
Now, however, GE’s analyst Joe Ritchie has issued a “buy” rating on GE stock. What’s more, he set an ambitious $10 price target, which represents a little over 25% upside from current share price. Ritchie wrote that the new GE is a “leaner, structurally more productive company with better capital discipline.” As the pandemic ends, Ritchie expects GE to improve its free cash flow generation dramatically.
Bottom Line
I’ve long made the bull argument for GE stock. There are some great assets at the company — and that hasn’t changed. With Larry Culp running General Electric, the firm now has a capable leader who can unlock the value of GE’s crown jewels.
However, this process has been anything but easy. Even now, as 2020 winds down, GE is still paying the price for errors made by previous leadership. The SEC Wells notice — and any subsequent fines or penalties — is not the fault of current management.
Still, these problems are painful. It seems every time GE stock is about to turn the corner, some new bad luck hits.
But the fundamentals still point to GE’s eventual success. Goldman Sachs agrees, despite critics, skeptics and government scrutiny. As always, it’s not a fun or pleasant experience owning GE stock. However, its resilience in the wake of this latest setback should reassure shareholders.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.