I frequently view corporate troubles as a buying opportunity. Those troubles may be as the result of something like a data breach, as was the case with Equifax (EFX), which jumped around 35% in the three months after I wrote this article, or they may come from a negative reaction to corporate actions, as was the case when Fiserv (FISV) announced their buyout of First Data. Two months after I wrote this buy recommendation following that big drop, the stock is around 25% higher.
Not all bad news for companies is an opportunity, however, and Boeing (BA) is a good example of why.
I am sure you have heard about Boeing’s problems by now. Two of their new generation 737 Max-8 airplanes have tragically crashed in the last 6 months, both times killing everybody on board. As I said, the market’s tendency to overreact in this often frantic and hyperbolic 24-hour news cycle means that when stocks drop on bad news, they frequently bounce back quickly.
This is different.
What we are talking about here is not something embarrassing for a corporation or some doubt over the wisdom of a decision -- we are talking about an issue that has a cost measurable in human life and the tragic consequences for the victims’ families.
It is not an issue that will fade away as the media focus grinds inexorably on to the next story, nor should it be.
In part, that is because of Boeing’s reaction. In these days, when safety is taken for granted, we seem to have forgotten that flying through the air in a metal tube is inherently dangerous and a reluctance to overreact to a crash is understandable in some ways. Accidents do happen, and jumping to conclusions about them before all the facts are known is not a good idea.
Here though, that kind of logic is not the point. We rightly expect aircraft manufacturers to act with an abundance of caution when there are potential problems with their products and in this case, Boeing look like they have failed to do that.
Again, however justified they may feel that to be, and the lack of a “recall” or grounding of the planes concerned may even actually be justified given the many thousands of safe flights taken by these aircraft since their launch, it is the image that will count over time.
Regardless of whether or not this is actually true, there is a perception that Boeing as a company is protecting profits at all costs.
The long-term argument for the stock would be that as America’s largest exporter, Boeing will recover, and the 737 Max-8 is just one model, as important as it may be. There may be some truth to that, but any recovery will take time and there are plenty of reasons to think that further declines are coming.
At this point, Monday’s bounce back in BA looks like the market’s overreaction, not the initial 20% drop, especially given the mounting pressure on the U.S., as one of the last holdouts, to officially ground the planes.
Ironically, the kind of misconception that so often leads to overreaction to corporate news is exactly the thing that could mean that the effects of this story remain with Boeing for a long time. If it is a problem with the planes (and again, that is suspected, but not yet proven) it is obviously a problem with one specific model, but for most of the public, that is too fine a distinction.
Anecdotal evidence is notoriously unreliable but I’m sure I am not the only one who has heard over the last few days “I don’t care, I’m not flying on a Boeing for a while.”
The problems for Boeing in the near future are twofold. First, it looks unlikely that the U.S. can continue without grounding the planes for long as pressure mounts. Actually, by the time they do it may be an empty gesture, as the airlines will probably have taken that action themselves by then. Even so, the symbolism of it would push the stock significantly lower.
Second, there are the longer-term implications for Boeing’s relationships with its customers. One airline is already seeking compensation for grounding the planes, and if every regulatory body in the world grounds them, others will follow. The legal issues for Boeing could grind on for a long time.
So, this is not a typical market or public overreaction to a corporate story. It will not go away or be brushed over quickly and the stock could well fall considerably further as it plays out. Boeing will survive and at some point, may even represent value, but for now, don’t be tempted by the drop.