Buying shares on a dip can be profitable- but before you splash the cash it’s best to be confident of the stock’s prospects for recovery. Two big stocks dipping right now are General Electric Company (NYSE:GE) and Advanced Micro Devices, Inc. (NASDAQ:AMD). For example, General Electric- which is trading at five-year lows- is at a real crunch point as the new CEO does his best to turn the company around following jaw-droppingly poor third quarter results. Meanwhile, AMD faces an uncertain future as the source of its recent demand surge could start to rapidly deaccelerate. Let’s delve deeper now, and see what the Street has to say about these two struggling stocks:
Shares in flailing industrial conglomerate General Electric plunged over 12% from $20.68 to just $17.90 this week.
The reason for the fall: GE’s announcement that it will slash its dividend in half to 12 cents a share, and aggressively restructure the company to focus on health care, aviation and energy. This will include reducing the number of seats on the board and cutting jobs at its home office by 25%. “The GE of the future is going to be a more focused industrial company,” CEO John Flannery said at the company’s investor day on Monday. “It will leverage a lot of game-changing capabilities.” He went on to call the big dividend cut “extremely painful” but added that the divided did have “a path to grow going forward.”
For dip buyers is now a time to invest or is it best to stay away? Well for top JP Morgan analyst Steven Tusa the answer is clear. He has a Sell rating on GE with a $17 price target- the stock’s lowest price target yet at 10.6% downside from the current share price. Tusa says that the dividend cut is “towards the lower end of consensus estimates”. He admits that it is a start in the right direction, and should result in about $4 billion extra of annual cash. But at the same time the remaining dividend, at a yield of 2.3%, is at “an above average level” compared to GE’s peers- which suggests it is still much too high.
Tusa concludes: “To be clear, the devil will be in the details from the pitch, and underlying assumptions that support this level are key, but so far this is about as bad as we had expected, following 3Q results that were undoubtedly worse than most could have imagined 6 months ago.” And for these investors who are still in doubt, note that Tusa seems to know what he is talking about. Across his 17 ratings on GE stock, he has an impressive 100% success rate and 19% average return.
TipRanks reveals that overall, GE has a very divided outlook according to the Street. Indeed in the last three months General Electric has received 4 buy, 6 hold and 4 sell ratings, giving it a Hold analyst consensus rating. The average price target from these analysts of $23.42 now stands at a 31% upside from the current share price.
Advanced Micro Devices
Volatile semiconductor stock AMD is suffering right now. Share prices are down over the last month from $14.3 to the current price of just $11.09. But now is probably not the time to step in for Morgan Stanley analyst Joseph Moore. He has just reiterated his Sell rating on the stock with a very bearish $8 price target. This would suggest that AMD has is set to fall by another 26%.
He believes that the pinch will come as it becomes increasingly unprofitable to buy AMD cards for cryptocurrency “mining” efforts. And it is the sharp increase in sales of graphics chips to cryptocurrency miners which Moore credits with helping AMD’s recent surge. Indeed, there has already been a reduction in cryptocurrency demand from the initial spike about six months ago. The cryptocurrency software is changing, and the next ethereum platform milestone ‘Metropolis’ is bad news for AMD says Moore.
In particular, the second part of the Metropolis milestone, Casper which is planned for the next 12-18 months will render mining basically obsolete as a way to participate and benefit from Ethereum. And as a result: “We believe that total graphics sales for Ethereum mining in 2017 will be $800 mn or so, and will decline by 50% in 2018; we can validate the 2017 number by looking at the increased complexity of the algorithm,” says Moore. In particular he believes AMD will be hit worse than rival Nvidia as AMD has not been clear about the size of its exposure.
The analyst uses Bitcoin as an example of how the situation looks set to play out. He says that after a period of time, Bitcoin miners developed semi-custom chips designed for the Bitcoin mining application. As a result, graphics chips became obsolete for that application. He warns that “This caused AMD significant headwinds, as Bitcoin declined, and channel partners who had been unable to procure AMD chips during the period of shortage had shifted resources to NVIDIA.”
However, it is worth noting that, while Moore is a top analyst overall, on AMD specifically he has a very dubious track record. Across his 10 AMD ratings he has a success rate of only 40% and an average return of -57%. Though a combination of hold and sell ratings, Moore effectively missed out on AMD’s huge rally from under $2 in 2016 to over $14.5 in March this year. In contrast, Jefferies Mark Lipacis has a much better track record on the stock and still had a buy rating and $19 price target. He says buy AMD for its undervalued ‘unique’ intellectual property due to the x86 and GPUs.
Overall, we can see from TipRanks that AMD, like GE, has a Hold analyst consensus rating. In the last three months this breaks down into 8 buy, 9 hold and 4 sell ratings. Meanwhile- with prices falling- the average analyst price target of $14.72 translates into big upside potential of close to 32% from the current share price.