Stock Analysts Now Pulling Support for Boeing
In spite of all the problems that Boeing has had lately with its 737 MAX aircraft, Wall St. Analysts have stood by them. The leaked emails now having them turning on Boeing.
Boeing started 2019 by simply busting out of the gate. From the close of trading on December 24 to the close on March 1, Boeing stock rose by a very impressive 50%. It was a good thing that the stock built up so much altitude during the first 2 months of the year because they were about to fall from the sky.
March was not a good month for Boeing, as this is where the concerns about their 737 MAX aircraft really surfaced.
This started back in September 2018, a 737 MAX took off from Jakarta in Indonesia, and 12 minutes later it crashed into the Java Sea, and all 189 passengers and crew were lost.
Planes do crash from time to time, and the market took this one pretty well. Boeing stock actually went up over the next 9 days after the crash, and this was during the mini-bear market of the fourth quarter of 2018, at a time where market pressure was decidedly negative overall.
Boeing’s fast takeoff in 2019 really put any concerns that the market may have had about this crash and this aircraft, but the second crash of the 737 MAX that happened in March was a completely different story.
On March 10, another one of these aircraft crashed shortly after takeoff from Addis Ababa, Ethiopia, which only took 6 minutes this time to fall from the sky. With two of these aircraft crashing over such a short period of time and both crashing during takeoff, this was seen as much more of a red flag.
It was quickly discovered that there was an issue with the software of this plane that caused it to behave erratically on takeoff, and this caused all of them to be grounded. They are still grounded 7 months later, and getting them back in the air remains a work in progress.
The hope has been that they will be back in service this year, but as the year winds down, the hope has turned to skepticism. Still though, analysts have stuck with the stock, and while we’ve come down quite a way from the high on March 1, we were still up 20% year to date on September 26 and up 15% year to date last Thursday.
That’s not bad at all for a stock that has come under such fire and experienced such a major event, but then the news came out last Friday that Boeing knew about this issue all the way back in 2016.
We saw almost a 7% drop in Boeing stock on that day, as this was just too much for the market to bear when added on top of all the other troubles that Boeing has faced. Fixing the software issues behind this is one thing, but attracting the ire of regulators has the potential to scare investors and analysts even more.
This Is a Paper Tiger, At Least So Far
Boeing didn’t waste any time clarifying their position and pointed out that they had already shared this information with authorities back in February, even before the second crash that set this all off. While the public may have been surprised by these new developments, regulators were already well aware of them and did not act.
This should really put an end to the matter, as having this come out in the media really has no bearing at all on the situation or Boeing’s business, but when it comes to stocks, emotion often rules the day, and it certainly is this time.
When we see emotion sparking some real moves with stocks, this can present real opportunities to wait until the dust settles and jump on when it starts to move the other way, to take advantage of the overreaction correcting. The bigger investors take advantage of this, and this actually becomes self-fulfilling, as the expectation of the correction causes it.
Boeing losing 10% of its value over what is basically just media hype should strike us as very odd. Sure, investors can run scared, but was this really an event where they would run scared this much?
In reality, this is more like traders running, and they aren’t really running scared, they run because they are trained to do exactly that when a siren goes off like this. This is the real reason why fading these things work, because it’s only the short-term long money that is fleeing, the very fair-weather crowd, and the weather that this created was far worse than fair.
The storm that is created here isn’t one that arose out of business concerns, as prices rule the world of traders, and once the news hit, this was more than enough to send them scrambling and causing more and more to join them.
The shorter-term folks then leave the party, and this allows those who take a longer-term view and would like to build their positions to jump in and buy more at a discount. Traders ride their coat tails and will jump on their backs on the way back up and help sustain the rebound.
While this should look more like an opportunity to buy, at least when it subsides, Wall St. analysts have lined up to abandon the stock that they have so patiently stuck with since the event started, and almost all downgraded it from a buy to a hold.
A hold from an analyst is worse than it appears, and since they are paid by the companies that own the stocks they rate, they aren’t going to want to use the “s” word very often. We’ve at least seen some at least use underperform instead of hold, but this should come with the advisory that it does not make sense to hold stocks that are expected to underperform over positions in those which are expected to overperform.
It also usually takes quite a bit to upset these analysts, who seem quite disposed to be overly optimistic about the companies they follow, and it is almost like they do enough on the downside to at least have somewhat of an appearance of not being just cheerleaders or sales people, although they still are to a significant degree.
Analysts Turn on Boeing
In this light, the consensus moving away from being bullish on Boeing to turning bearish is especially significant. We might think that it should take far more than this to have them reverse their course, but if we’re looking to buy Boeing at a bigger discount than otherwise, this plays right into our hands, regardless of the rationale or lack thereof.
UBS analyst Myles Walton is basing his downgrade from buy to hold on the risk that he perceives this recent leak will have. Walton is worried that what both we and the FAA have been shown about this isn’t the whole story, and more details may emerge that will damn Boeing further.
This is not outside the realm of possibility of course, and this issue only has the potential to get worse. While we have knocked down the stock price of Boeing far too much than what we know should have, what we don’t know may be the decider.
On the other hand, when we look at what we do know, it might be more of a stretch than it may appear to think that things really could get that much worse. The new evidence would have to be significantly worse though, because the FAA already did not even act when they learned about the disturbing information that has emerged about this plane’s testing and this constitutes a buy-in on Boeing’s side unless the table is really turned over.
Credit Suisse’s Robert Spingarn bases his downgrade to hold on the fact that “we can no longer defend the shares in light of the latest discoveries, discoveries that significantly increase the risk profile for investors.”
The big question is if the risk has been significantly increased for investors or not. If you are in Boeing for the long-term, this will not play much of a role in the grander scheme of things. The wind has picked up right now and it’s harder to fly, but Boeing’s experience in being a dominant force in this industry should ultimately prevail.
This is what investors in Boeing are counting on, and whether they take a hit from this or not right now, the situation will very likely resolve and we’ll be back to business once again, as if this never happened.
Other analysts shared their concerns alongside their downgrades, with some curiously referring to their take on the company’s business prospects, even though the fundamentals that they are referring to have not updated.
At least Morgan Stanley’s Rajeev Lalwani stood up for the side of sensibility, calling the event a “false alarm” as well as pointing out that this is not something that was not previously known. Lalwani is maintaining his buy rating on Boeing and has a price target of $500, $60 above its all-time high hit last March.
This is not an event that we should be pricing down by 10%, or even lower if the move downward continues into next week. Whether we’re looking to ride the trading rebound or are interested in Boeing over the long haul, this recent lurch down provides us the opportunity to get into the stock more cheaply.
Editor, MarketReview.com
Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.
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