GE is recovering, making its shares look undervalued

As expected, General Electric (GE) is on the mend, its stock price is reflecting that new reality, and so I'm reiterating my buy rating for the company, first recommended on June 2, 2009 at a price of $13.80. If you took my advice then, you're up 25%.

Institutional investors are looking past GE's likely 12% -15% revenue decline for 2009 to better performance in 2010. As of November, it appeared GE would be fortunate to register flat revenue for 2010, but look for that forecast to be revised upward: GE, a microcosm of the U.S. economy, is recovering. True, there is still the risk that loan default rates will rise, creating more hiccups at the recently-bolstered GE Capital Finance, but the calculation here is that the worst is behind GE Capital and the company's strong, diverse business lines will more than offset the finance's division's short-term negative contributions.

Increased industrial orders from emerging market giants China and Brazil should provide one tailwind; orders from the Middle East also should impress. U.S. government/state government spending on infrastructure will provide a second tailwind; the recovery of commercial aviation globally will provide the third. The bottom line: GE is undervalued.

The First Call FY2009/FY2010 EPS estimates for GE are 99 cents to 92 cents. That 92 cent fiscal 2010 EPS estimate will likely prove to be low.

Technically, General Electric's stock chart is strong. It shows an uptrend, but with above average volatility. Hence, don't buy GE unless you can tolerate a 15% drop in the stock's price in a month -- it could happen. Also, GE will encounter psychological resistance at $20, but this should prove to be minor. GE, in my view, is headed north.

Stock Analysis: General Electric is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% position now; then buy another 25% in one month as long as U.S. and global economic conditions don't become substantially worse. Under any circumstance, don't buy more than 75% of your GE position before February 2010. Sell/Stop Loss if you were to buy shares in this company: $9.25.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

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