The stock market continued to gain ground on Wednesday morning, with investors looking on the bright side in considering what the near-term future is likely to bring. The latest reading on inflation turned out to be relatively benign, with core inflation excluding food and energy rising just 0.1% in February. By 11:30 a.m. EST, the Dow Jones Industrial Average (DJINDICES:^DJI) was in record territory, having soared another 390 points to 32,223. The S&P 500 (SNPINDEX:^GSPC) had climbed 28 points to 3,904, and the Nasdaq Composite (NASDAQINDEX:^IXIC) lagged behind but was still up 81 points to 13,155.
Stock market investors are showing a new appreciation for old-economy stocks that tend to move in line with the business cycle. With expectations for explosive vaccine-inspired economic growth, many of those cyclical stocks stand to gain a lot. Yet what once was a giant among cyclicals, General Electric (NYSE:GE), was falling on Wednesday morning as shareholders considered the industrial conglomerate's latest attempt to execute on its recovery efforts and become a blue chip stock once again.
General Electric keeps on divesting
GE shares were down almost 6% as of 11:30 a.m. EST. Investors reacted negatively to the company's outlook in general and particularly to two moves that the company made to try to shore up its future.
First, the conglomerate said it had agreed with AerCap Holdings (NYSE:AER) to merge its GE Capital aviation services business into AerCap. However, this won't be a straight merger; General Electric will take out about $24 billion in cash, which it expects to use to continue its efforts to reduce debt, and after the deal is done, GE will have a 46% ownership stake in the combined company.
The move continues a long-term trajectory for GE away from its once-massive capital lending business. In the run-up to the financial crisis, GE Capital became so big that it had exposure comparable to that of some of the biggest financial institutions in the business. Yet when the financial crisis hit, it knocked GE Capital for a loop and did damage to the rest of the company's industrial business as well.
CEO Larry Culp argued that this latest step of GE's transformation will continue to make the company less risky. By focusing on aerospace manufacturing rather than aviation leasing, GE hopes to take advantage of improving conditions in the commercial aircraft industry once the pandemic gets under control.
Is GE really on the road to recovery?
General Electric also released a detailed outlook for 2021, arguing that it sees a positive trajectory for its multiple businesses. It sees the core industrial business posting organic revenue growth in low-single-digit percentages. The best growth will likely come from renewable energy, but even there, the company expects only mid-single-digit percentage gains. Slower gains for healthcare and aviation are still better than the mid-single-digit percentage decline expected for GE Power.
Perhaps worst of all, GE said it will look for approval to do a 1-for-8 reverse stock split. The result will be to take GE's stock price back toward around $100 per share, but with investors keeping only one share for every eight that they own currently. For many companies, reverse stock splits have been a last-gasp effort to remain feasible businesses. That's not exactly the case for GE, which still sports a market capitalization above $100 billion, but investors still prefer seeing companies boost their stock price through actual appreciation rather than split gimmicks.
GE has gone through many indignities over the past 20 years, culminating in its removal from the Dow Jones Industrial Average after more than a century of being part of the venerable market benchmark. Despite the industrial conglomerate's own optimistic outlook, Wall Street is far from convinced that General Electric will regain its status as a blue chip stock again.