The love and hate relationship Wall Street seemingly has with General Electric Company (NYSE: GE) stems from a lack of trust investors now have with CEO Jeff Immelt. But can placing a long-term bet here on GE stock, which has fallen some 4.4% year-to-date, prove to be a wise move? My crystal ball says no.
Despite the improvements General Electric has made to firm up its industrial capabilities and exit none-core businesses, GE stock continues to lag the market, trading flat over the past year, while the S&P 500 index has risen 20% during that span.
Part of the reason is Immelt’s own fault. In a recent letter to shareholders, Immelt proclaimed the United States is “diverging” from the rest of the world and will be “less of a leader in trade.”
President Donald Trump, who withdrew the United States from the 12-nation Trans-Pacific partnership trade deal in January, addressed congress Tuesday night, vowing to stop U.S. manufacturing jobs from leaving the country.
Much of Immelt’s implied skepticism has to do with his lack of trust in Trump’s policies.
Immelt realizes that his decisions to strengthen General Electric in the realm of oil and gas could now backfire. GE’s oil and gas segment has invested heavily to supply Iraq and Iran with infrastructure development. In fact, the company recently landed a $1.4 billion order from Iraq’s Ministry of Electricity to supply the country with power generation services.
Why Trump Could Cause Trouble for GE Stock
Trump’s travel ban, protectionism and fair-trade enforcement puts Immelt and General Electric in a delicate position in terms of its foreign relationships. For that matter, GE stock is in the same position when it comes to the investments it has made in China. In his letter, the CEO added that the ideas that once powered U.S. economic industrial expansion and produced concepts such as “innovation, productivity and globalization” were being challenged and “protectionism” was on the rise.
Immelt is essentially reminding investors that his company, which focuses on emerging as a global industrial power, now has its own country’s policies as a headwind. On the one hand, the trade restrictions could affect General Electric, adding even more pressure to GE stock. At the same time, however, Trump is also a big advocate of deregulation.
In Tuesday night’s speech, the president said that he would support a rule that forces an entity to remove two older regulations for each new regulation the government wishes to impose. So while, Trump’s protectionist and fair trade policies might be perceived as a headwind for global companies such as General Electric, his stance on deregulation and, in particular, is his pro-business policies, should promote increased competitiveness of U.S.-based companies.
In other words, GE might need to shift gears. Will Immelt be the one to lead the company in this new direction?
Bottom Line for General Electric
General Electric, which pays an attractive 3.2% yield, hasn’t excited investors with breathtaking earnings results for some time. The company has instead looked to offset its lack of earnings sex appeal by returning cash return to shareholders, including plans to return $26 billion to shareholders in 2017.
At the same time, GE stock won’t drive much higher without knowing how Trump’s policies could undo the year’s of work Immelt has done to return GE to a global industrial power. In other words, the company’s revenue strength might now be its biggest weakness.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
