Once it invented the lightbulb, General Electric Co. (NYSE: GE) spent the better part of the next 105 years expanding everywhere into consumer and industrial electronics. If it had an 'ON' switch, chances are GE made it.
That's how the company became a solid investment. In fact, on Wall Street, GE was known as a "widows and orphans" stock - completely safe for regular investors to buy and hold. It was the bluest of the blue chips - a decent dividend-payer and a stock to pass on to your grandchildren.
The company continued to diversify into content creation and distribution, software, pharmaceuticals, healthcare, and even capital.
And then, in 2008, the company imploded - spectacularly. It was that capital division that did it in the end.
GE Capital was very nearly fatal to the company. The king of American industry had to go begging for emergency funding of $74 billion to cover its financing needs. Millions of hitherto confident shareholders got slaughtered and watched the stock drop from a high of $42 down to $5.73.
What's happened since is something every investor needs to know, whether you're considering picking up GE shares, selling them, or hanging onto them...
How GE Got into the Money Business (and Nearly Died There)
GE initially ventured into consumer finance during the Great Depression to facilitate sales of its appliances.
The company's zest for growth and genius for meeting unfulfilled customer needs soon sent the capital business skyrocketing. Why not help customers buy your own products - especially when you collect the interest?
For decades, a veritable army of capital-related businesses financed purchases of nearly everything GE made, from consumer products like their "Daylite" black and white televisions to commercial products like their GEnx turbofans for Boeing 747 jet airliners.
GE's Capital businesses did everything from issuing "white label" credit cards and providing mortgage money to financing the company's energy and capital markets trading operations.
By 2008, more than half of the company's $18 billion earnings that year were derived from its GE Capital-related businesses.
Things were getting "complicated"...
Technically, although the company owned only two small banks, which combined accounted for less than 3% of the company's assets, by 2008, GE was the nation's seventh-largest bank in terms of loan assets, putting it between Morgan Stanley and U.S. Bancorp.
And while GE Capital wasn't an FDIC-insured, Federal Reserve-regulated bank, in terms of "assets" it had in fact become the nation's largest "shadow bank."
Instead of relying on a huge deposit base, GE Capital's businesses financed loans and capital markets operations by issuing short-term commercial paper, which it constantly had to roll over. Because GE itself naturally sported a AAA rating, GE Capital's cost of money, or the interest it paid on its commercial paper and other borrowing facilities, was advantageously low, allowing it to grow and compete toe-to-toe with big banks and finance companies.
When the commercial paper market and other short-term funding sources came to a standstill in the autumn of 2008, GE very suddenly couldn't finance its ongoing capital, consumer or commercial loan, leasing, or lending businesses.
Because of its two small banks, GE turned to the FDIC for help. With a few twists and turns of existing banking regulations, GE got access to FDIC backing, which allowed the Federal Reserve to facilitate its capital needs.
The company's escape was a very near thing. While the company survived - barely - its future was uncertain.
GE's Daring Bid for Survival Hinged on Two Things
Its future as a viable concern, let alone a desirable stock, depended on the answers to two big questions:
- Would it continue its risky (but profitable) de facto banking operations in capital markets and consumer and commercial credit?
- Would it shed its industrial operations to raise much-needed cash?
The company went another way - and here's where it gets interesting.
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GE spent years repairing its capital businesses - with a lot of help from the Fed's zero-interest-rate policies.
Then it decided to get rid of them.
In 2015, the company announced it would get rid of banking operations and reduce GE Capital's net investments by $100 billion by year's end. The ultimate goal was to reduce GE Capital's $500 billion in assets by at least $200 billion.
In other words, GE was moving back to basics, back to what it had always been good at: a diversified, market-crushing industrial business.
Under Chairman and CEO Jeff Immelt's direction, the company immediately and methodically went to work doing just that.
First, GE Capital Corporation's separate international and U.S. operations were consolidated into a single holding company, GE Capital U.S. Holdings.
The new holding company was then folded into GE so its obligations could be assumed by the more staid industrial core - with its better credit ratings.
Then it sold its immense loan books, worth more than $128 billion, to a diverse group of banks and investors like Wells Fargo & Co. (NYSE: WFC), the Blackstone Group LP (NYSE: BX), TPG Special Situation Partners, and CarVal Investors.
And, in another savvy move, GE spun off its $25 billion consumer credit arm to shareholders as Synchrony Financial (NYSE: SYF). It offered a complicated swap to shareholders that ultimately had the effect of reducing GE shares outstanding by around 7%.
So far in 2015, GE has shed over $126 billion of assets, significantly ahead of its $100 billion goal for the year. It's already shopping its $60 billion worth of international assets covering France and Italy.
The company ultimately shed the banking side of its business, not only to rid itself of the volatile funding issues associated with capital-related businesses, its exposure to financial meltdowns and the "systemically important" label it would have garnered by banking regulators, which would burden it significantly, but to build a better future.
GE Is Back in Fighting Form... and It's Buying Big
That future, as articulated by Jeff Immelt, is about making GE into a "digital industrial company" serving the expanding global digital industrial economy. The CEO has called GE a "new industrial Internet company."
Immelt talks a lot about the "industrial Internet," the "fourth industrial revolution," and how he is remaking GE into a leader in every aspect of that future.
In September, the company formed a new business unit called GE Digital, to push integration of the Internet and its industrial products through proprietary software and sensors across product lines. In the digital future, GE plans things like "rolling and flying data centers" and increasing the "tera-data capture" that Big Data analytics requires to increase industrial efficiencies.
With its expanding cash hoard from divesting itself of GE Capital U.S. Holdings' assets, the company is already on the hunt for strategic purchases.
To enhance its dominance in turbines, turbine maintenance, and expand its power and grid assets, GE recently closed on its purchase of France's Alstom SA (EPA: ALO). At over $16 billion, it's GE's largest-ever acquisition. The deal will be incrementally positive and accretive for GE in 2016, adding about $0.05 per share in earnings.
But much more than that, the Alstom acquisition will solidify GE's position as the dominant player in those businesses.
Now GE's looking at drilling assets and drilling services businesses that might be spun out of Baker Hughes Inc. (NYSE: BHI) and Halliburton Co. (NYSE: HAL) as they seek to close their intended merger in early 2016. With oil and gas in a dramatic downturn, GE could pick up valuable assets at bargain basement prices to add to its already expansive oil and gas assets.
With GE's new focus on generating 90% of its earnings from industrial businesses, its new mantra of growing earnings per share organically, its margin expansion drive, its buybacks, and its ability to take on more leverage while maintaining (and even elevating) its credit ratings, it's no wonder investors are taking notice.
How to Play GE's Comeback
Famed billionaire investor Nelson Peltz's Trian Partners recently took a $2.5 billion position in GE, which he says is worth $40 to $45 a share if the company pursues more buybacks on top of the $9 billion a year GE's already committed itself to.
There's no doubt in my mind that the GE that's being rebuilt will be every bit as good as (and a lot better than) the once legendary company whose stock was once so revered.
But... before you buy at $30...
GE's been on a tear and may have gotten a little ahead of itself. It's been promising shareholders quite a lot - and largely delivering - but it may back up a little from here on account of its failed deal to sell it appliance business to Electrolux. What's more, some investors are balking at buying any more oil and gas assets in the current market.
If you own GE it's definitely a hold, probably for a long, long time - maybe even forever.
For one thing, with a 3% dividend, the stock pays you well to hold it.
There's no reason to sell GE and only a fool would try and short it, even though it may be prone to a downdraft after its rapid ascent to the $30 level.
As a buyer, I'd allocate a chunk of money to a position in GE and divide that up into four equal pieces. I'd use a quarter of my GE capital to buy shares around $28, because I believe GE's a little overbought up here around $30. I'd look to average down and use half of my capital to buy shares around $26. And I'd buy the last shares at $24.
The only reason I believe GE's shares could backtrack from here is because I'm expecting a correction in 2016, and I don't believe any stock will be immune from a wicked sell-off that looks to be brewing over the horizon.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.