GE fate no better or worse ex Dow

GE’s fate no better or worse ex-Dow

Summary

General Electric, a charter member of the Dow Jones Industrial Average, is being booted from the index after 111 years on the list.

Out with a whimper

It’s another dent to the reputation of a company that has written off billions of dollars over the last few years due to financial misadventures and exposure to industries in structural decline. But is the news much more than that? The Dow Jones infamously eschews the modern capitalisation-based make up that underlies benchmarks like the S&P 500. Instead, the DJIA is price-weighted with an adjustment for stock splits, spin-offs, etc. The ‘Dow Divisor’ is currently less than one, meaning the index is numerically bigger than the sum of each individual part (a share). For these reasons, relatively little institutionally managed money tracks the index, so further GE declines can’t be pinned on the deletion. The stock’s near-80% deflation since September 2000 means the index won’t flinch either. GE stock traded 1% lower at the time of writing on Wednesday ahead of its Dow exit on 26^th June. The index was 43 points lower. Shares in GE’s replacement, Walgreens Boots Alliance, were 3.5% higher.

First exit, then split?

If only GE’s Dow ejection were its biggest challenge. An 88% profit collapse in the power generation business last financial year and weakness in oil, gas and transportation culminated in a $10bn loss in Q4 compared to a $3.48bn profit a year earlier. The group then announced an $11bn charge in January and said it was looking into a break up. The stock has since lost 28%. That speaks volumes about how investors view the quality of potential proceeds. Having relinquished control of GE’s transportation unit in May, CEO John Flannery has declined to walk back the break-up scenario, even as plans to eliminate thousands of jobs and cut $3.5bn in costs kick in. He has also provided contradictory guidance on the dividend, since slashing it in November. With operating cash flow in 2019 forecast to rise $1.2bn to $9.56bn—two thirds lower than 2014’s—and dividend payments seen totaling $4.3bn, margin for error is slim. The group will report Q2 earnings on 20^th July.

Thoughts on GE’s technical chart

It still looks too early to get positive on GE’s long-term share price potential. The stock has not had a winning week since the middle of May. As stated last month, GE has recently struggled with the key range support of $14-$14.07, a battle it now appears to have lost. The last time the stock was below the range, it bottomed just under $6. Regardless of whether downward pressure is sufficient to bring an exact repeat performance this time round, the psychological pressure on investors will be real enough. More recently, in the week ending 30^th March the stock closed at $12.73, 2 cents away from the low for the current week so far. The price also kept above that floor by small amounts in the first three weeks of April, backing the idea of a support there. However, the stock is in a definitively downward phase having crossed below the 200-day moving average threshold last June, inverting that line in subsequent months and leaving it still pointing lower to date. The weekly Relative Strength Index oscillator is structurally neutral as it remains above the oversold boundary line. Furthermore, RSI remained over sold for four months when it crossed the boundary last time. A sustained bounce can’t be ruled out though the stock will look heavy to all but the most resolute optimists right now.