Trade of the Week: General Electric

Through Oct. 5 this year, the 30 stocks that make up the Dow Jones Industrial Average had widely variable returns. The two best were Boeing (BA) and Caterpillar (CAT) . IBM (IBM) and General Electric Co.   (GE) caused the most grief for their shareholders.

The full list is shown below. Despite a terrific overall environment, five of the 30 names were net losers so far this year -- including venerable Disney (DIS) , Verizon Communications  (VZ) and Exxon Mobil (XOM) .

Chasing BA or CAT at this stage makes no sense. They have had their runs and appear overpriced by historical measures. Ditto for most of this year's other big winners.

Perhaps it's time to consider adopting a "dog," like GE -- at least for a trading opportunity. Former long-time CEO Jeff Immelt stepped down (was pushed out?) recently. Based on both company metrics and stock-price performance, Jack Welch's designated successor did not distinguish himself. GE's most recent decade was pretty pathetic. (GE is a holding of Action Alerts PLUS.)

New management is trying to shake things up. Other execs are on their way out. Relatively small things, like the news item, below, are setting the tone on cost cutting and the need to reestablish GE as a growth vehicle.

The stock is near a low point. As of Friday, Oct. 6, 2017, GE was carving out new two-year lows in the $23 to $25 range. The shares are way cheaper than their old peak in 2013. GE's yield is getting close to the 4% mark, which should lend some support.

Expectations are now pretty low. Consensus views look for EPS of $1.55 this year -- and then $1.66 in 2018. That means GE, at a recent $24.26, trades for about 14.6x next year's estimate -- a bit cheaper than its long-term average P/E of 16.1x.

What is GE really worth? That all depends on whether John Flannery, the new CEO, succeeds in getting things moving in the right direction.

Standard & Poor's opinion on GE reflects this problem. Analyst Jim Corridore calls the stock a 3-star, hold, while maintaining a 12-month price target of $27. That implies total return potential of about 14%. S&P's computer-generated, and backward-looking fair value number, though, says GE is only worth $23.27.

Lukewarm previous results and bad share price action looks unattractive. The possibility for improved future results, stacked upon a much lower stock price, skew risk/reward to the favorable side.

Company officers have been steady net buyers over the last six months. August saw a pronounced jump in the dollar amounts. GE's large Feb. 2017, insider sale took place with the stock more than $5 higher, at $29.56.

Independent research from Morningstar assumes good things are on tap. They rate GE a 4-star out of 5 Buy while calling present day fair value as $32.

Is that realistic? That goal may seems optimistic, but it's in line with GE's past trading history. During each of the calendar years 2013 through 2017 YTD, GE peaked at prices ranging from $27.90 to $33.

The option market provides a valid glance at what professional traders think about future prospects. Low "put" premiums on 2019 LEAP options imply few believe downside risk on GE is very high.

That is a positive indicator for those willing to take a bullish stance. Margins of safety on GE's $25, 28 and $30 strike price puts are low simply because that "insurance" will probably not be needed.

Selling these put options is a good proxy for ownership of GE shares without the need to actually lay out any cash right away.

Maximum profits on these option sales would be keeping 100% of all premium collected. In these examples that would represent about $250 to $605 per 100-share commitment.

Worst-case, forced purchase would be at net exercise levels not available since the market's brief summer melt-down of 2015.

Future stock market action can never be guaranteed. We can know for sure, though, that owning GE at below $24 per share would have been a winning position almost 100% of the time since September 2015.

New management might be just the tonic needed to turn this ship around. I'm making General Electric my Real Money "Trade of the Week" for total return. You'll be paid almost 4% for your time and have a legitimate shot at a move back to $27 - $32 over the coming 12 to 18 months.

Buy GE shares, sell some puts of consider doing both.

Paul Price is a regular contributor to real Money Pro. Click here to learn about this dynamic market information service for active traders.

At the time of publication, Price was short GE Jan. 2019 $28 puts, although positions may change at any time.

Action Alerts PLUS, which Jim Cramer manages as a charitable trust, is long GE.