General Electric (NYSE:GE) is in the middle of a massive corporate overhaul. Investors worried about its ability to navigate that evolution successfully have pushed its share prices down some 70% from their 2016 highs to levels not seen since the Great Recession.

This is a special situation stock with huge upside potential if the turnaround effort works. But putting that "special situation" tag on GE changes the investment equation in a big way. Yes, it could be a millionaire maker stock, but only if you're willing to take on the risk that it could also flame out. Here's what you need to think about before you jump aboard here.

An iconic leader who left a mess behind him

The troubles currently facing GE can really be traced back to Jack Welch --  an assertion that to some people probably sounds like heresy. Welch was a powerful presence in the business world, often hailed as one of the greatest managers of all time. However, it was under his watch that GE allowed its finance arm to expand beyond its core purpose.

A man with his head on a table and a graph behind him with a line heading sharply lower

Image source: Getty Images

Like many industrial companies, GE has an in-house finance business that provides credit to customers so they can afford the often-huge costs of the industrial products GE makes. This is a good business practice, and not odd at all. However, the often-huge profits generated by the finance division led GE to expand its footprint into other areas, like home mortgages. When the Great Recession hit, the company's survival was threatened by the losses from its finance division. Jeff Immelt, Welch's successor, was in charge by that point, and he was forced to cut GE's dividend, take massive write offs, sell assets, and accept a government bailout.

Immelt did manage to keep GE going, however, and started to steer it in a new direction focused entirely on the industrial space. That said, his efforts, which included a couple of large acquisitions, didn't produce the results that the board was hoping to see, and they replaced him in mid-2017 with insider John Flannery. The new CEO announced write offs, asset sales, and a dividend cut, explaining to investors that things were worse than his predecessor had been letting on.   

Flannery only lasted about a year on the job before the board shifted gears yet again in late 2018 to bring in outsider Lawrence Culp. Culp, who had been a member of the board, had previously put up a strong record at the helm of Danaher, a much smaller industrial company. He came in, explained that the company was in worse shape than investors were led to believe, and announced... write offs, asset sales, and the reduction of the quarterly dividend to just a penny a share (just enough so that institutional investors with a dividend mandate could continue to own the stock). That basically brings the story up to today's special situation designation.   

What's next?

At this point, General Electric is struggling under a heavy debt load and ongoing uncertainty in what's left of its finance arm. (Much of the business has been sold, leaving something of a black box housing liabilities that no other company wanted to take on.) To put a number on that, GE's financial debt to equity ratio of nearly 1.3 times is well above that of its peers, many of which are at 0.25 or less. One of Culp's first priorities is to get leverage under control. If he can do that, investors are likely to start viewing GE in a far more positive light.

GE Financial Debt to Equity (Quarterly) Chart

GE Financial Debt to Equity (Quarterly) data by YCharts

The problem is that GE's long-term debt at the end of 2018 was $110 billion. That huge sum will require a lot of heavy lifting to pare down. Management has made material progress, reducing debt by around 18% in 2018, but the improvement on that metric came at a cost. Put simply, GE is dismantling the business, raising cash by selling assets.   

The problem is that GE is not selling from a position of strength. That requires it to accept prices it might not like. A great example of this is the company's decision to reduce its stake in Baker Hughes, a GE Company (NYSE:BHGE) during Q4 2018. It was a big move, taking GE's ownership from 62.5% to just 50.4%. The problem is that the sale is taking place while Baker Hughes' stock is trading near multi-year lows. It should come as no surprise that some analysts think GE is getting desperate.   

That view is bolstered by the fact that GE is also considering putting some of its crown jewels up for sale. For example, it plans to spin off a stake in its healthcare division. It also changed the terms of its agreement to merge its transportation division with Westinghouse Air Brake Technologies (NYSE:WAB), also known as Wabtec, so that it could raise more cash from the deal. The interesting thing here is that this change will turn what would have been a tax-free transaction for shareholders into one that is taxable. Most companies' executives would refrain from making such a shareholder-unfriendly move unless they had a genuinely pressing reason ... such as an urgent need to raise cash quickly. 

There are a lot of moving parts to the GE overhaul, and management is acting quickly. On the one hand that's nice to see, since it shows that current leadership wants to right the ship as quickly as possible. However, moving too fast risks mistakes, such as accepting low prices for assets, or burdening shareholders with additional costs. In other words, there is a lot of uncertainty here for investors, though there's a lot of upside potential if Culp can get the company moving in the right direction again.

Only for those with strong stomachs

At the end of the day, General Electric could indeed be a millionaire maker stock if management can turn it around. Many industry watchers, by the way, believe that they will, and see today's low price as a buying opportunity. That said, there's a huge amount of uncertainty here, and for most investors, the risks inherent in jumping on this turnaround play aren't worth it. With so many of its recent moves hinting at desperation, only those with strong constitutions should be looking at GE today.