GE’s StarMine Warning Beats Moody’s Downgrade

April 9th, 2012 by

AlphaNow beat the credit rating agencies in warning investors that credit issues at General Electric Co. (GE.N) appeared significant enough to warrant avoiding the stock. On April 3, Moody’s announced it had downgraded the credit ratings of General Electric as well as those of its finance unit, GE Capital Corp, by one notch, to Aa3 and A1 respectively. In its release, the agency said the downgrade came on the heels of a re-evaluation of Moody’s methodology, and reflected its view that the risk profile of GE Capital’s funding model is greater than was reflected by its previous rating. (For more information on the downgrade, see this Reuters article.)

Already, however, we had excluded GE from our “Hi-Lo” portfolio, a list of companies that offer investors relatively high dividend yields while still paying out a relatively low proportion of their cash in the form of dividends. This wasn’t because the company didn’t qualify on those two counts but because our model “Hi-Lo” portfolio excludes stocks that have low StarMine rankings for either their ability to sustain prior earnings (their Earnings Quality, or EQ rank) or a low ranking on the SmartRatios Credit Risk (SRCR) model. GE’s rank on the SRCR model was a mere 8 out of a possible 100, signaling further downside price risk for holders of GE securities, given that the magnitude of the deterioration in the SRCR has yet to be fully reflected in the price of stock. (See the chart below for more information.) Translating the SRCR model score of 8 into an equivalent agency rating, you can see that the resulting Market Implied Rating is B, well into “junk” territory and far below the S&P and even the recently lowered Moody’s ratings. In our 2012 model portfolio made up of stocks that we believe have a good chance of beating the market, we explained why General Electric would be among the household names that you wouldn’t see included in the list.

Chart 1. GE’s StarMine Implied Credit Rating (red line) has been consistently below the Moody’s rating, which was recently downgraded one notch, with risks still remaining.

When it comes to technical analysis, the picture doesn’t look any rosier for GE’s stock, as seen in Chart 2, below. The weekly slow stochastic indicator in the lower panel is now turning down after having lingered in overbought territory for several weeks. The last time this happened was in the first quarter of 2011, at the beginning of spring: GE’s shares lost about 35% of their value from peak to trough. GE’s recent high stock price still lags below the high levels it recorded in 2011, despite the fact that the rally in the S&P 500 has propelled the index to higher highs than it saw during the course of 2011. That pattern suggests that the blue-chip stock can’t be seen as a market leader at this stage, and that anyone interested in acquiring stock in General Electric can afford to wait a while longer to see if the 2011 pattern is repeated in 2012.

Chart 2. Technical analysis of GE’s weekly stock chart shows that the slow stochastic is behaving similarly to the same period in 2011, prior to a protracted decline in the stock price. The recent high is lower than the 2011 high, which may concern technicians.

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