It’s Almost Like the Shocking GE Short Thesis Never Happened
It’s Almost Like the Shocking GE Short Thesis Never Happened
(Bloomberg) -- It has been a little over two months since General Electric Co. shares plunged to an 11-year low after prominent financial examiner Harry Markopolos accused the company of accounting fraud. Yet, despite the strong initial reaction, it seems the market has largely shrugged off the allegations.
GE shares have barely moved and the documentation surrounding the call appears to have disappeared.
“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,” RBC Capital Markets analyst Deane Dray said in a phone interview. Markopolos rose to prominence after he raised concerns over investment manager Bernie Madoff before the historic fraud became public.
Upon a closer look at the GE call, however, the analyst said the claims “fell flat,” since the report had unearthed no new news or data, nor offered any fresh analysis or argument. The report alleged that GE was hiding massive loss ratios and that its cash situation was far worse than disclosed in regulatory filings.
“It was August, there was not a lot of news going on, but once the dust settled, the aftershock of this died down very, very quickly,” Dray added, noting that Markopolos’ relationship with a hedge fund, which was mentioned in the report but never identified, “just negated some of the legitimacy of it.” Investor questions about the report have also dried up, he said, and that he has not received any queries about the allegations in the past month.
In the meantime, the website used to make the allegations against GE no longer appears active, and typing in the address only prompts an error message. The report can still be found using a direct link, however.
Markopolos did not immediately respond to emails seeking comment on Friday.
In the August report, Markopolos had said he was working with a midsize hedge fund based on East Coast, although the identity of the firm never became public. It is worth noting that despite GE’s many troubles over the past couple of years, short interest as a percentage of the free float in the company’s stock has mostly remained below 2% in the past 12 months, according to financial analytics firm S3 Partners.
GE at the time the report became public dismissed the claims as “meritless,” and the company’s Chief Executive Officer Larry Culp called the report a “market manipulation, pure and simple.”
Leaving the merits of the report aside, GE’s Wall Street critics are not yet convinced about its turnaround plan. The company’s second-quarter results, despite beating expectations, prompted one of the most bearish analysts to recommend selling the stock, saying “the underlying core fundamentals are actually a bit worse.” According to data compiled by Bloomberg, 4 analysts rate GE at the equivalent of a sell, 11 recommend a hold, while 10 say it’s a buy.
With the company gearing up to report third-quarter results next week, management may have to field questions from analysts pertaining to some of the concerns raised by the report. Markopolos’ claims that GE will need to increase its insurance reserves immediately by $18.5 billion in cash -- plus an additional noncash charge of $10.5 billion when some new accounting rules take effect -- will be of particular focus. Either way, results are primed for a volatile day -- options are pricing a larger than average move for shares at almost 6%.
To contact the reporters on this story: Joshua Fineman in New York at jfineman@bloomberg.net;Esha Dey in New York at edey@bloomberg.net
To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Courtney Dentch
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