Volatility Ahead as General Electric Split Sees Growth in Short Interest

It’s been a strong year for General Electric (NYSE:GE), but after posting 60% in the first half of 2024 it appears that the stock has become too bloated to handle for the institutions driving its outperformance. 

One of the key factors in driving its recent performance has been the anticipation of GE’s split into three independent public companies, GE Aerospace, GE HealthCare, and GE Vernova focusing on the energy side of operations. 

The move, which was announced back in November 2021 and carried out in April 2024, came as a concerted effort to streamline operations and develop specialisms among the different entities. 

In terms of performance, General Electric has been on a consistent upward trajectory since September 2022 and has rallied more than 200% between Q1 2023 and Q2 2024. 

The firm’s outperformance was underlined in its Q1 2024 earnings, which surpassed expectations despite decreasing from last year. 

General Electric’s earnings totaled $1.5 billion at $1.38 per share, down significantly from the $6.1 billion or $5.56 per share in Q1 2023. However, this figure still blitzed expectations of $0.65 earnings per share in comparison to GE’s adjusted earnings of $900m or $0.82 per share. 

Additionally, the firm’s revenue for the quarter climbed 11% to $16.1 billion from $14.5 billion last year. 

The positive relative performance of GE saw the firm increase its quarterly dividend to investors on April 25 to $0.28 per share, representing a boost from its previous quarterly dividend of $0.08 and an annualized dividend and dividend yield of $1.12 and 0.69% respectively. 

Drawing Institutional Interest

General Electric’s outperformance was tracked by a number of institutions that had increased their stake in shares of the firm moving into 2024. 

Rathbones Group PLC boosted its stake in shares by 2.7% in Q4 2023 after acquiring an additional 5,997 shares for a total of 225,814. The investment management firm’s total GE share value was worth $28,821,000 at the end of the most recent reporting period. 

This trend has been echoed by a number of institutions throughout the past year. Northern Trust Corp added 4% to its GE holdings in Q3 2023 for a total exposure of $1,170,551,000 while Norges Bank added 410,061 for a total worth around $1,193,159,000. 

Morgan Stanley also added 5.1% in Q3 to boost its total holdings to 8,955,511 for a value of $990,032,000. 

Meanwhile Brown Advisory opted to grow its stake in shares of GE by 62.3% throughout Q4 for a total of 4,881,752 at a value of $623,058,000. 

Is General Electric Due a Correction?

Despite significant institutional enthusiasm in the second half of 2023, the sustainability of General Electric’s growth has come into question of late. 

With slower profit growth of 6.3% expected over the next couple of years, are there signs of bloatedness coming into play for a stock that’s drawn much enthusiasm over GE’s recent split?

“Investor optimism has been fuelled by the anticipation of the planned spin-off of GE”s energy business Vernova on 2 April,” notes Maxim Manturov, head of investment research at Freedom24. “Following the spin-off, General Electric has moved into GE Aerospace, which further fuelled investor enthusiasm.”

“While momentum is undoubtedly strong, investors should be cautious given the stock’s rapid rise and the possibility of a correction after such a significant rise.”

Warning Signs as Institutions Line Up Short Positions

According to DefenseWorld, May 2024 saw a swelling of short interest in General Electric totaling 11,120,000 shares on May 15 at a growth of 6.6% in comparison to the 10,430,000 shares on April 30. 

Based on an average daily volume of around 7,450,000 shares, the days-to-cover ratio is currently 1.5 days. Additionally, 1% of the shares of the stock are sold short. 

Among GE’s short sellers was boutique investment firm Vulcan Value Partners, which used its Q1 2024 investor letter to acknowledge the strong recent performance of the stock and highlighted a shrinking margin of safety as the root cause for the exit. 

An Ear to the Ground Required

Following General Electric’s split into three specialist organizations, it’s never been more important for investors to spend more time researching the fundamentals of this new look entity, and its ramifications for the stock as a whole. 

Fundamental analysis into the firm’s innovation pipeline, as it seeks to build on its market presence, is essential, while the world’s ongoing energy supply concerns in the wake of geopolitical conflicts could see GE Vernova’s performance impacted. 

With an acceleration of short interest in recent months, we’re likely to see more volatility ahead for GE stock in the short-term, but as a firm taking its first steps after a major restructuring program, all bets are off for General Electric’s long-term prospects.