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Steer Clear of GE, Bet on These Industrial ETFs Instead

The industrial conglomerate giant, General Electric GE, saw the steepest one-day decline since April 2009 after it slashed dividend and issued a downbeat profit guidance.

The stock lost as much as 8.2% on Nov 13 to close at the lowest level since Jun 7, 2012, wiping out more than $12 billion of the company’s market value. It trumped its daily average volume of 58.6 million as nearly 261.6 million shares moved hands on the day.

What Went Wrong?

The 125-year-old conglomerate will halve its quarterly dividend to 12 cents per share effective December. It marks the company’s second dividend cut since the Great Depression. As per S&P Global data, this is the largest ever by a U.S. company since the 2008-2009 financial crisis.

General Electric also trimmed its fiscal 2018 earnings per share guidance to $1.00-$1.07 from $2.00. The high end is well below the current Zacks Consensus Estimate of $1.15. Additionally, the company is expecting weak free cash flow of roughly $7 billion, about half the normal level (read: Industrials ETFs in Focus on Q3 Earnings).

The move came as new Chief Executive John Flannery proposed corporate restructuring that would turn around the business fortunes. The plan entails the shedding of $20 billion in assets over the next year or two through the divestiture of oil and gas exploration, transportation and the energy connection/lighting businesses, and  paring down its operations into three core businesses — aviation, power and health care.

Estimates Go Down

General Electric has seen negative earnings estimate revision of 3.2% each for the current and next year, in the past three months. For this year, the Zacks Consensus Estimate is currently pegged at $1.06, representing a 28.8% decline from the prior year and well below the industry average growth of 9.41%. This signals more trouble for this industrial conglomerate, compelling investors to look elsewhere. Further, General Electric currently has a Zacks Rank #5 (Strong Sell) and a drab VGM Style Score of F.

From a year-to-date perspective, shares of the company declined about 40% compared with a loss of 3.5% for the conglomerates industry. Investors should note that General Electric is the worst performing stock this year among the Dow's components, shedding about $1000 billion in market value. In comparison, the Dow Jones has gained 18.6%.

Industrials Sector Fares Well

The performance of General Electric has been miserable in comparison to the industrial sector’s solid return of 17.7% this year. This is particularly true as rising manufacturing activity and an improving aerospace & defense industry are driving industrials stocks. The sector is also poised to benefit from continued investments in infrastructure-related assets like railroads, autos and housing. Additionally, Trump’s tax reform hopes have instilled confidence in his pro-industrial agenda and spread optimism in the sector (read: 3 ETFs to Play Upbeat Global Manufacturing).

How to Play the Industrials Boom?

In this scenario, investors seeking broad exposure to this growing sector and wanting to avoid the GE stock could consider the following ETFs. Any of these could be solid picks in the coming months given that these funds have a favorable Zacks ETF Rank #2 (Buy) or 3 (Hold).

First Trust Industrials/Producer Durables AlphaDEX Fund FXR

This fund follows the StrataQuant Industrials Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index and ranks them on both growth and value factors. The approach results in a basket of 93 securities, with none holding more than 2% share. Machinery, aerospace & defense, airlines, and road & rail are the top four industries with double-digit exposure each. The fund has accumulated nearly $1.6 billion in AUM and sees a good trading volume of about 137,000 shares a day. It charges 66 bps in fees per year and has gained 14.7% so far this year. The product has a Zacks ETF Rank #2 (read: 5 Solid Reasons to Buy Industrial ETFs Now).

First Trust RBA American Industrial Renaissance ETF AIRR

The ETF offers exposure to the small and mid-cap securities in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index. Holding 58 stocks in its basket, the fund is pretty well spread across components, with none holding more than 3.5% share. In terms of industrial exposure, engineering and construction and industrial engineering take the top two spots with a combined 55% of the portfolio. The product has $198.4 million in AUM and trades in a low volume of around 47,000 shares per day on average. It charges 70 bps in fees and expenses and has gained 9.4% so far this year. AIRR has a Zacks ETF Rank #3.

PowerShares DWA Industrials Momentum Portfolio PRN

The fund provides exposure to 43 companies by tracking the Dorsey Wright Industrials Technical Leaders Index. It is well balanced across each security with none accounting for more than 4.7% share in the basket. In terms of industrial exposure, aerospace and defense, electronic equipment, and machinery make up the top three, with double-digit allocation each. The fund has amassed $122.1 million in its asset base and charges 60 bps in annual fees. It trades in average daily volume of 7,000 shares and has rallied 19.9% so far this year. PRN has a Zacks ETF Rank #2.

PowerShares S&P SmallCap Industrials Portfolio PSCI

This product follows the S&P SmallCap 600 Capped Industrials Index and holds a basket of 103 securities, which are widely spread across as each security holds less than 2.7% share. From an industrial look, machinery takes the top spot at 29.1% while commercial services & supplies, professional services, building products, and aerospace & defense round off the top five. It has AUM of $99.8 million and trades in a paltry volume of 7,000 shares. The ETF has expense ratio of 0.29% and has gained 10.1% this year. It has a Zacks ETF Rank #2 (read: Small Cap ETFs & Stocks Crushing Russell 2000).

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General Electric Company (GE): Free Stock Analysis Report
 
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