New Buy Alert: Wall St. Has This Stock All Wrong…
“Do you know what happens when you pick bottoms? You get smelly fingers!”
Bob was a veteran trader who worked for Bear Stearns at the beginning of the financial crisis. I had made the mistake of asking him a question about buying one of my favorite stocks. And all I got from this wise sage was an elementary school riddle.
“Thanks a lot Bob,” I murmured as I walked back to my desk.
If you spend any time talking to other investors, you’ll likely hear a lot of one-line (and often conflicting) statements.
- “It’s easy! Buy low, sell high”
- “Never catch a falling knife”
- “The trend is your friend”
- “Buy great companies at a cheap price”
- “The herd is always wrong”
While the phrases can sometimes clarify some key concepts, they often get taken out of context or applied in the wrong situations.
Today, I want to introduce you to a blue chip company that I’m very fond of, and explain why the conventional wisdom for this investment opportunity is way off…
When Good Stocks Do Bad Things…
Few things are more frustrating than watching a good investment trade lower and lower.
Unfortunately, that’s exactly what has happened to investors in General Electric (NYSE:GE) this year. The stock started 2017 at $31.60 and is currently trading near $22. That’s a 30% pullback so far this year!
If you’ve been holding on to shares of GE this year, should you sell your shares now or wait it out? What about if you’re not invested in GE… Is now a good time to buy?
Conventional Wall Street wisdom has some conflicting advice for you.
You’ve probably heard that it is unwise to buy a stock that is currently moving lower. That’s been likened to “catching a falling knife” — or my least favorite — “picking a bottom with smelly fingers.”
So this would imply that it is unwise to own shares of GE right now, because the stock has been trading lower all year.
At the same time, you’ve probably heard the stories about Warren Buffett and other famous value investors who make a killing buying stocks that were cheap and unloved. That’s a great way to accumulate wealth over time.
So which is it? Should you avoid a stock that is trading lower? Or should you buy quality stocks when you get an opportunity to own them at a discount?
Well, I think you can make the case for either concept. But as you’ll see in a moment, I’m partial to owning shares of GE today (if you’re the right kind of investor).
Timing Is Everything
When faced with the decision of whether to buy a stock at a discount price, or avoid the stock because it is trading lower, it’s important to consider the timing of your trade.
By “timing” I’m talking about how long you intend to hold on to your investment.
If you’re buying a stock for a period of weeks or months, then it’s very important to look at the current trend of the price. That’s because a stock’s trend is often the best indicator of which way a stock will move for a short period of time.
So if you’re a short-term trader, I suggest avoiding situations like GE in today’s market. Because you may find yourself frustrated if your investment doesn’t work out as planned right away.
On the other hand, long-term investors who are interested in owning great companies for long periods of time (in some cases even for a lifetime), then a pullback in the stock price represents an excellent buying opportunity.
If you commit to buying shares of great companies whenever they fall out of favor with the market, you’ll be much more likely to amass a tremendous amount of wealth over time thanks to your wise low-priced investments.
Here’s a quick example of this trend at work — using the same stock we’re covering today… General Electric!
Despite the 30% pullback in GE’s share price this year, readers of my Lifetime Income Report dividend letter are only down a modest 5% on their investment.
How is this possible?
Well, we originally purchased shares of GE back in June of 2014, when the stock was trading at $26.83. Incidentally, GE started 2014 off with a quick 13% decline that left some investors worried. But buying that decline turned out to be a good investment as shares of GE rebounded and spent most of 2016 above $30.
If you’re doing the math at home, you’ll quickly note that the stock is down more than 5% from our 2014 buy price. But keep in mind, that this blue chip company has paid us reliable dividends throughout the last three years. And those dividends have gone a long way towards offsetting even the sharp decline we’ve experienced this year.
GE’s Short-Term Struggles and Long-Term Prospects
The decline for GE this year stems largely from investors’ uncertainty with the company’s direction.
GE has been working hard to get back to its roots as an industrial powerhouse. We cheered as the company divested many of its high-risk financial assets associated with GE Capital. And now, GE is working on identifying which of its businesses are the most profitable, and focusing its resources on these particular areas.
Along with these changes, GE has appointed a new CEO — John L. Flannery — who has been ruffling some feathers.
The CEO is anxious to cut costs and get rid of businesses that don’t give GE a distinctive edge.
In a lot of ways, this process is like cleaning out an old attic or garage. The process starts by getting a lot more messy (pardon the grammar) before things really get better.
And right now, we’re in the messiest part of the cleanup process.
Flannery is making the tough decisions necessary to get rid of bureaucratic waste and inefficiencies. These things crop up over time — especially with a big company with so many different product lines.
But at this point, all of the bad news appears to be out. Last week, the company announced earnings that were very disappointing and issued guidance that caught investors off guard. Sort of like when you start cleaning out the garage and find a wasp nest in the back.
The good news is now that all of the bad news has been broken to investors, the company is free to start rebuilding.
Keep in mind, GE is still a very profitable company despite the setbacks.
That’s why I think shares of GE are an excellent investment right now.
The company still has tremendous products and a name brand that is respected in many different industries. GE still has institutional customers that are hungry for the products and services that GE offers. And GE still has some of the very best technology and patents to give the company a competitive edge over rivals.
In short, the 2017 pullback in GE is a gift to investors. It’s a chance to buy this quality company at a steep discount. It’s a chance to lock in dividend payments for years to come.
That doesn’t mean GE shares will rebound immediately. It may take some time for other investors to regain confidence in the company.
But I feel very certain that if you buy shares of GE today and hold them for the next several years, you’ll enjoy a healthy return that will also keep your wealth stable and protected.
Action to take: Buy shares of GE at the market today!
Here’s to growing and protecting your wealth!