General Electric Just Got an October Surprise From a Major Investor

Barron’s is reporting that a third-quarter filing by Wellcome Trust, a major General Electric NYSE: GE stockholder, showed the trust sold its entire position in GE stock. Wellcome, based in London, had previously held 24 million shares in GE. The trust had built up their position in the company through 2018 and maintained their position through the second quarter of 2019.

In an article posted as an Inside Scoop feature, Barron’s Ed Lin reports that the company’s third-quarter filing showed it no longer owned shares of GE. That means that at some point during the quarter, the trust divested all of the shares.

As of this writing, Wellcome had not responded to a request for comment on the sale of the shares.

A company such as Wellcome could have many reasons for liquidating a position. However, the timing is uncomfortable for General Electric. Even the most bullish analysts are skeptical in advance of the company’s earnings report next week.

General Electric will report earnings on October 30

The company will be one of the more closely watched this earnings period. Wall Street estimates are for earnings of 12 cents a share with sales of $28.9 billion.

It’s been an up-and-down year for the beleaguered company. Once a “forever” stock, GE has fallen on difficult times. That all looked to be coming to an end with the hiring of Larry Culp as the company’s CEO.

The thinking was that Culp would help realign GE with its core businesses. Culp performed a similar turnaround at Danaher. And, prior to the third quarter of this year, Wall Street seemed to be satisfied with the progress Culp was making.

GE stock had an impressive 44.3% gain in the first half. However, the third quarter has seen the stock lose nearly 50% of that gain. The stock currently is sitting at a gain of approximately 23%. However, on a year-over-year basis, the stock is down 21%.

Investors are going to be scrutinizing GE stock regarding its cash flow and debt reduction. But they will also be looking for any hidden insurance liabilities. This stems from an August report from forensic accountant Harry Markopolos. In the report, Markopolos accused GE of $38 billion in accounting fraud. According to Markopolos, the company has huge, hidden losses in its long-term care (LTC) insurance business which is part of its GE Capital unit.

The report has had little effect on share price

Despite initially pushing the stock below a key level of support, it seems the market has decided there is no merit to the accusation. In the two months since GE stock has gained back all of the losses. Furthermore, the documentation surrounding the claim appears to have disappeared.

In a phone interview with Bloomberg, RBC Capital Markets analyst Deane Dray said, “The allegation was alarming when it came out in August, and there was some credibility based on the author’s prior success with Madoff, so it got some immediate attention.”

However, Dray said that once analysts took a closer look at the GE call, the claims “fell flat.” According to Dray the report had unearthed no new news or data, nor offered any fresh analysis or argument. 

This was important news for GE. From the moment the report was released, Culp had said it was “market manipulation, pure and simple”. This was due to the fact that Markopolos had said he was working with a midsized hedge fund whose name was never disclosed. Culp has earned high marks for being a straight shooter. The claim of accounting fraud, had it been proven, would have diminished much of the goodwill that Culp has been building.  

However, the Securities & Exchange Commission (SEC) is still probing aspects of GE’s insurance accounting as legacy long-term care policies remain a concern for all insurance companies.

Is GE out of the woods?

Whether or not the Markopolos report has merit, some Wall Street analysts are not completely sold on General Electric’s turnaround plan. Although the company posted second-quarter results that beat expectations, one of the most bearish analysts quipped, “the underlying core fundamentals are actually a bit worse”. The analyst, along with 3 others rated GE stock at the equivalent of a cell and 11 gave the stock a hold rating. However, 10 analysts gave the stock a buy rating.

In early October, GE announced a pension freeze as one of their latest attempts to cut the company’s debt obligations. The pension announcement came just one day after an analyst had issued a warning regarding the ability of GE’s jet-engine unit to shoulder a share of GE’s heavy debt and pension burden.