GE stocks bounce back 9.7%
Analysts dispute allegations of hidden financial peril
General Electric Co. shares bounced back on Friday after a rout Thursday as Wall Street analysts defended the industrial conglomerate against allegations from a prominent financial examiner and reiterated their faith in the chief executive officer.
Shares rose 9.7% in New York after Thursday’s 11% decline, which marked the steepest drop since 2008. William Blair analyst Nicholas Heymann questioned whether the whistleblower report is “the last Molotov cocktail” and said he does not believe GE’s financial statements purposely misrepresented the company’s financial condition and potential liabilities.
The report’s effort to portray GE’s financial condition with an assumption that charges worth about $38 billion should have been previously recognized was “at best disingenuous and at worst highly inaccurate,” he wrote.
Harry Markopolos, who was involved in exposing the frauds of investment manager Bernie Madoff, said in a report on Thursday that GE would need to raise its insurance reserves immediately by $18.5 billion in cash — plus an additional non-cash charge of $10.5 billion when new accounting rules take effect. He also claimed that GE was hiding a loss of more than $9 billion on its holdings in Baker Hughes.
Markopolos said that the company’s cash situation was “far worse than disclosed in their 2018” annual report.
Citi analyst Andrew Kaplowitz said there were “sufficient shortcomings” in the report itself, and that he continued to believe in CEO Larry Culp’s ability to improve the company. Some of the allegations made in the report were already known and others were “known unknowns,” the analyst said, adding that the Baker Hughes write-off was already expected.
Baker Hughes shares also rose 1.7% on Friday in New York.
The resurgence in GE shares on Friday will also mean some gains for Culp, who bought $2 million of GE stock on Thursday, a move that reflected “high conviction that the allegations do not represent incremental unknown challenges,” Citi’s Kaplowitz said. Baker Hughes’ Chief Executive Officer Lorenzo Simonelli also bought $309,081 of shares in the oil and gas services provider Thursday.
General Electric’s stock plunge Thursday came at an awkward time for some of Wall Street’s savviest investors, after a recent buying spree by the likes of Renaissance Technologies, Citadel Advisors and Adage Capital Management.
Hedge funds added more shares of GE than any other company to their industrial investments in the second quarter, according to an initial analysis of U.S. regulatory filings compiled by Bloomberg Global Data. Their holdings increased by 25% to a total of 199.3 million shares, valued at $2.09 billion at the quarter’s end.
While some recent buyers may have sold since then, many of them were probably left holding the bag in the fallout from Markopolos’ report.
While Friday’s advance softened the blow, the rout highlights the perils in trying to call a bottom as a company attempts a turnaround from an epic collapse. GE’s market value fell by more than $200 billion in the two years ended Dec. 31 amid weak cash flow, a slump in its power division and two chief executive changes.
It’s impossible to know which hedge funds may have sold some or all of their GE holdings before Thursday’s rout, and the firms typically don’t discuss their holdings.
Renaissance added 38.3 million GE shares in the second quarter, more than doubling its holdings in the company, according to data compiled by Bloomberg. Renaissance is a quantitative fund that makes investing decisions based on mathematical and statistical methods, a representative said, declining to provide additional comment.
Citadel’s hedge fund bought about 4.5 million shares during the period, increasing its stake more than sixfold, according to regulatory filings.
Adage, which declined to comment, took a new position of 7.24 million GE shares.
Not all hedge funds were buyers in the second quarter. Steadfast Capital Management dumped almost all of the 15.3 million GE shares it held as of March 31. The firm didn’t immediately respond to a request for comment. Tocqueville Asset Management, which declined to comment, pared its holdings 37% to 1.7 million shares.
This week, prominent buyers swooped in amid the selloff. Hedge fund billionaire Stanley Druckenmiller said he picked up GE shares on Thursday. The implication that Culp and the new management team are engaged in intentional fraud is “outrageous,” he said by email.
For the analysis of hedgefund investments, Bloomberg looked at 824 filings for the second quarter, which showed $1.66 trillion in total stock holdings. Industrial-sector investments accounted for $120.5 billion, or 7.2% of the value of the securities listed in the filings. The firms cut their holdings the most in railroad CSX Corp., which has fallen 17% since the end of the period.