How to Trade GE Stock After CEO Shakeup

Here's how to trade General Electric stock now that it has a new CEO.
By Bret Kenwell ,

John Flannery is out as CEO and Larry Culp is in at General Electric (GE) - Get Report .

With just 13 months on the job, the board has decided that Flannery's time with the company is up and Culp, the former CEO of Danaher (DHR) - Get Report  (from 2000 to 2014), will replace him.

Shares of GE are responding favorably, up more than 8% Monday despite being off their highs of the day. But what does this mean for shareholders going forward?

The move is reminiscent of what happened to Sashi Brown, the general manager of the National Football League's Cleveland Browns. He was brought in to turn the Cleveland football team around and relish in the rebirth of an NFL playoff-caliber team. Except none of that happened. Brown made tough cuts, parted ways with players, built a young roster and stockpiled a treasure chest of draft picks. Then he was kicked to the curb for current GM John Dorsey, who's doing a pretty good job so far.

It drew a lot of mixed reactions as Brown didn't have much time and in essence, did all the painful work of cutting, trimming and stockpiling so he could reap the reward. That's similar to GE's Flannery, who walked into a terrible situation last summer, as costs and pension obligations were weighing heavily on GE's balance sheet.

He was forced to sell assets, cut the dividend as free cash outflow burned a hole in GE's wallet and made a whole host of tough decisions. He was going through the painful process of turning around a conglomerate. Only like Sashi Brown, he won't be around to see how it turns out as Culp will now be handed the reigns to reap what Flannery sowed.

Is it fair? Perhaps not. But for GE shareholders, it's hard to feel too bad. Even with Monday's big rally, shares are still down about 50% over the past 12 months. Culp is a formidable leader and there's a reason why Danaher has done so well over the past. Shares are up 28% over the past year, 70% over the past three and almost 110% over the past five. Granted, Culp has been there the last few years, but he laid the groundwork for success. 

During Culp's time with Danaher, he increased revenues and market cap five-fold, despite fighting through two massive bear markets. 

Danaher is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DHR? Learn more now.

However, he's still got plenty of work to do. GE said it wouldn't hit its prior earnings and free-cash flow guidance and didn't issue an update. Free-cash flow remains a serious question mark in the short term, as a lack of cash flow can put strain on the balance sheet and may even lead to another cut in the dividend.

Trading GE Stock

There's no question all eyes will be on General Electric stock later this month when it reports quarterly results. Will it rally into the event or decline? That much is unknown as of now.

What we do know is that GE stock is itching to end its painful downtrend.

While shares are up impressively on Monday, they are well off the highs as GE briefly poked above $13. At that point, shares were promptly rejected by the 100-day moving average and are currently below the 50-day moving average as well.

GE stock is teetering right on the prior downtrend line that's been plaguing shares for the entire year. GE desperately needs to stay above this mark, and preferably get back above the 50-day moving average. The move above September's highs was brief, but it will be encouraging to see if GE stock can get above and stay above that mark. That essentially means GE has to get above Monday's highs and take out the 100-day moving average.

Above all costs, it can't make a new low without causing serious concern for the stock.

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This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.

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