A Safer Way to Bet on GE’s Comeback

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Is it better to lie to investors or to tell them the truth? Based on what happened to General Electric ’s stock after Chief Executive Larry Culp stated harsh facts that should not have surprised anyone, lying seems better.

Earlier this month, Culp honestly assessed GE’s challenges—ranging from negative industrial free cash flow this year to ongoing struggles with the power business—during a talk with JPMorgan’s Stephen Tusa, a straight-talking analyst who has presciently chronicled GE’s many challenges.

Shortly thereafter, GE’s stock (ticker: GE) sharply declined, and the airwaves erupted with pessimistic punditry. The stock is still sulking around $10, and no one is really talking anymore about the price marching to $20, as they had as recently as a few weeks ago. Had Culp been less forthcoming, or simply played to the crowd, at the JPMorgan conference, the stock might have advanced or at least not fallen as much.

In another time and place, Culp’s candor would be celebrated, but his candor with one of his toughest critics is not celebrated because institutional investors make America’s voters look stable and thoughtful.

Such investors mostly want to hear that everything is good, that if the road is bumpy, then at least the future is bright—bright enough for them to quietly dump stock to Wall Street’s groupies, otherwise known as individual investors, who rarely question what they see and hear.

Culp, who has led GE for about six months, faces a potentially pivotal moment that raises interesting questions about the nature of corporate leadership—and how best to manage Wall Street, which judges the world through the surreal kaleidoscope of short-term stock prices and how much it stands to make.

Yet perhaps it is irrelevant what happens in the short term. GE’s turnaround ranks as one of history’s most complicated restructuring challenges. A more measured investing approach is merited, and buying upside call options that expire in a year or longer gets the job done in a risk-adjusted way.

If Culp succeeds, GE’s stock price obviously advances, and the calls blossom like a thousand flowers on a dry hill that just got rained upon after a long drought. Should Culp fail—and he faces mighty challenges—calls cost less money than stock and the risk is limited to the premium paid.

Different investors will have different ideas about how best to play GE stock, but it is hard to go wrong simply buying a call that expires in January and that has a strike price that matches, or is slightly higher than, GE’s stock price.

If the stock is trading at $15 at expiration, and you bought a January $10 call, the call is worth $5. Should Culp’s honesty work against the stock and the price is below the strike at expiration, the simple call trade fails, and then we can all discuss the sickness of measuring the world in three-month increments and communicating complexities in PowerPoint presentations.

All of this brings to mind a conversation with a fellow whose job entailed making markets in stocks of companies that were making their public debut. He was a suave operator who was equally adept working rooms and markets. Once, when some obscure company with a well-known CEO was pricing a stock deal, he said that if you don’t know the horse, bet on the jockey.

GE, like most sprawling conglomerates, is difficult to evaluate. Culp, the jockey, is easier to know. He successfully ran Danaher (DHR) , and he is the first outsider to run GE, which in years past always seemed to mint a magic penny or two to beat quarterly earnings and keep investors happy.

It is no longer said that as goes GE, so goes the world. Instead, it seems more reasonable to expect Culp will candidly assess GE and that the stock may, in time, follow him on the higher path he has set for himself. The stock’s recent 2.8% bump after the company issued disappointing investor-day guidance is evidence of this.

Steven M. Sears is the chief investment officer of StratiFi Technologies.