I have been on the sidelines as far as writing goes, but have been busy as a beaver otherwise, so apologies for not writing sooner.
The first quarter rebound continues after taking a one-week hiatus last week from a historic bull run. The equity market got back on its horse this week, despite Boeing (BA); the largest holding in the Dow Jones Industrial Average (DJIA); taking a beating this week. This begs the question: What Should One Now Do with Boeing?
As my readers know, back in November, I became publicly bullish on BA stock. Specifically, I appeared on CNBC when BA was $318 and emphatically prognosticated that the stock would rise to $400. Then privately, on these pages, I suggested that BA, this year, would get to $425 and, with a China trade deal to $450. In February, BA made it to $425 and then took a big hit this week, about 11%, after one of its 737 MAX jets crashed in Ethiopia.
The move in BA from $318 to it’s high of $440 two weeks ago was all fundamentally driven. Over that period, BA boosted its dividend and reported a stellar 4th quarter. The recent drop was all due to a reaction to the plane crash. So how do I analyze these recent events?
To begin with, we must understand that BA 737 MAX orders and backlogs make it the company’s largest selling commercial product. Hence, we must respect the company’s exposure to that model.
What could account for the recent Ethiopian 737 MAX crash? There are five possibilities: 1) Pilot error; 2) Airline maintenance error; 3) Mechanical / technological / design defect; 4) Terrorism; or, 5) Sabotage. Of those five possibilities, only #3 is the fault of BA. If that is the case, then the entire 737 MAX class of aircraft is at risk – both planes in service and the order backlog.
If indeed BA is at fault, to what extent is the company liable? We must consider the three members of the “feasance” family. The first is nonfeasance, which in this case, is BA failure to take any required action. I find that unlikely as BA is a very proactive hands-on company. BA is emphatic that the company has tested 737 MAX aircraft and trained pilots on that equipment. The second is misfeasance, which is improper action on the part of BA. In other words, BA might have taken some actions with regard to the prior known problems with the 737 MAX, but not necessarily the correct actions. Simply put, BA made a mistake. That is the most likely outcome, if there is some design defect for which BA is responsible for. Lastly, we need to consider malfeasance, where BA knowingly engaged in a deliberate and perhaps illegal act contributing to the problem with the 737 MAX. While history shows that malfeasance has taken place in manufacturing or service companies (Enron and WorldCom come to mind), I place the probability of BA committing malfeasance as infinitesimal.
So, what do we do with holdings in BA? I do not think that one should sell positions in BA while the rest of the trading world overreacts to the Ethiopian crash. It is certainly understandable if some nations temporarily ground 737 MAX fleets until an investigation is performed and a cause is ascertained. Until such time, BA stock is in the penalty box. I would hold BA positions and get ready to add, if BA is not found to be at fault. If BA is found to be at fault, we must understand to what extent and what the financial cost is before tossing out BA shares.
Bottom line: wait till all the facts are in before you convict Boeing.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long BA, DDM & UDOW; although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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