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Is General Electric Poised to Become the Dow's 2018 Comeback Story?

By Dan Caplinger – Nov 14, 2017 at 9:04PM

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Find out how the worst performers in the stock market have done in subsequent years.

Investors in General Electric (GE -0.18%) have endured an abysmal 2017, seeing their stock plunge 40% so far this year in light of terrible business conditions, a change in management, and a 50% cut in its quarterly dividend. Shareholders have few reasons for hope in the immediate future from GE.

Yet one thing that long-term investors in the companies that make up the Dow Jones Industrials (^DJI -0.43%) have seen time and time again is the ability to bounce back from adversity. In that light, should GE investors expect a great 2018 from the conglomerate? Let's look at some past stories of turnarounds to see what next year could bring for General Electric.

Jet engines in a well-lit hangar.

Image source: General Electric.

Nike runs faster

In 2016, Nike (NKE -2.54%) was in a similar position to where GE is right now. The athletic footwear and apparel giant's losses weren't as extreme, having fallen 19% for the year, but many market watchers were ready to proclaim that Nike's fast-growth period had come to an end for good. Rising competition from Nike's overseas rival was eating into its market share, and the company behind the famous swoosh brand didn't appear to have an immediate response.

2017 has brought mixed success for Nike. Headwinds still remain, and the company is still struggling to overcome competitive challenges that are threatening its brand dominance in some key market segments. In response, Nike has highlighted its direct sales channels, working with e-commerce giants to bypass ailing third-party brick-and-mortar retailers and capture more of its profit. Nike stock is up a respectable 10% in 2017, rewarding those who stuck with the athletic giant after a terrible 2016.

Wal-Mart gets into the game

Wal-Mart Stores (WMT -0.47%) found itself in the Dow's basement in 2015, falling 26% for the year. The leading retailer in the world responded to competitive pressures by vowing to boost wages for workers and spend more on building out its e-commerce channel. The moves required short-term pain on Wal-Mart's bottom line, but most investors saw them as essential to ensure that the Arkansas-based giant wouldn't lose relevance in an increasingly digital marketplace.

2016 brought some progress for Wal-Mart, and the stock bounced back by 13%. The company started looking at ways to use its store network to its advantage, treating locations as potential distribution centers for quick delivery and other services. By using its size for negotiating leverage and its experience to make good deals, Wal-Mart is in far better shape than it was in 2015, and could see further gains in coming years.

Comeback stories aren't always quick

Yet investors need to understand that the turnarounds don't always work out as well as one would hope. The worst stock in the Dow in 2014 was IBM (IBM 0.31%), which fell 15% that year. In 2015, the stock lost another 14%, and Big Blue has struggled to find its footing ever since. The company at least expects to start growing its revenue again after 22 consecutive quarters of falling year-over-year sales. Yet even with cloud computing, data analytics, and other high-growth areas starting to have an impact, IBM remains bogged down by legacy businesses that lack the same growth punch.

General Electric faces some similar problems that IBM has had to deal with, and the size of GE's legacy business could make it more difficult for the conglomerate to do the about-face necessary to reinvent itself quickly. Yet without decisive action from corporate leaders on the strategic front, investors can't count on General Electric automatically posting a strong return in 2018 just because of its terrible performance in 2017.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

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