Shares of General Electric (GE), up nearly 20% on the year, have doubled the performance of the S&P 500 (SPX) off of its 2009 financial crisis lows. It’s important to place some context around that comment, as the stock declined about 85% from its high in late 2007 to its 2009 lows, vs the SPX that declined about 50% in that same time period:
While the SPX is just a percent from its recent all time highs, GE remains 28% below its 2007 high, and 50% below its 2000 all time high:
The 20 year chart above is interesting as the stock finally broke out of the downtrend that had been in place for the last two stock market crashes, and now there is little overhead resistance till the high $30s, possibly to the 2007 high just above $40.
From purely a technical standpoint, the stock breaking the short term uptrend over the last couple days could set up for a pullback to the October breakout level between $28 and $29:
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GE 1yr chart from Bloomberg[/caption]
Fundies: That’s the technical set up, which in many ways supports the fundamental goings on in 2015. The 10% gap in April was on news that the company was selling $27 billion in real estate assets, and planned to transform to a pure play industrial company by shedding non-core financial assets and then use the proceeds to buy back stock. Then the stock was in a slumber until October when they reported better than expected earnings, and got approval for their spin-out of Synchrony Financial (SYF), a consumer finance company which they owned 80% of. For the last month to six weeks there has been some upward buying pressure on the stock into what would be a pro ration for current holders into he spin, but with that behind, the stock is left to trade on its own merits into year end. I would expect that aside from a broad market meltdown, a dramatic strengthening of the US dollar, or a steep drop off in emerging market demand (GE gets half its sales outside the U.S.), the stock like holds $28 for the time being. The stock has a dividend yield of 3.05%, well above the 10 year Treasury yield, with the potential for increased buybacks to help buoy the stock. Oh an activist investor Nelson Peltz recently took a stake (here).
Options prices have come in hard since the demand drop off from arbs looking to replicate long exposure, and could be approaching levels that make sense for directional players. For those who are looking to play for a breakout above $30 in the new year, selling short dated options over the holiday period (that may be elevated given the Dec 16th FOMC meeting) to finance the purchase of longer dated calls could be the trade. The chart below of 30 day at the money Realized Volatility (how much the stock has moved-white line) vs the 30 day at the money Implied Volatility (the price of options-blue line) shows that realized has matched the lows just prior to the August stock market swoon, and IV on its way:
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GE 1yr chart of 30 day atm IV vs Realized Vol from Bloomberg[/caption]
The next identifiable catalysts for GE will be Q4 earnings scheduled for Jan 22nd before the open, which will fall in February expiration.
So What’s the Trade? If I were looking to own calls for a breakout following Q1 earnings I would consider buying a call calendar:
GE ($30.05) Buy the Dec 31st/ Feb $31 call calendar for 33 cents
-Sell to open 1 Dec31st 31 quarterly call at .17
-Buy to open 1 Feb 31 regular call for .50
Break-Even on Dec 31st Expiration:
Profits: max gain at $31
Losses: max risk of 33 cents premium on a sharp move lower, or higher through the strike.
Rationale – This trade does best with a consolidation or a slight creep up to $31 by year end. February options catch earnings so those should stay bid from a vol standpoint. If we get to year end with the stock here or slightly higher we’d look to roll up the short call or even just leave the February call as is as it’s becomes a very cheap way to own GE for a breakout in the New Year.