Last week, I said in this piece that the current level of volatility made me more inclined to take quick profits and losses than to look for longer-term opportunities. Over the few days since I wrote that the situation has, if anything, become even more exaggerated, but the market has reached the point where everything is so hugely overreacting to news, good and bad, that some bargains are just too good to miss. That means that when the narrative around a stock shifts, the retracements can be spectacular.
Take a look at what is happening to Bed Bath and Beyond (BBBY) this morning, for example:
I get why BBBY had been under pressure. They were struggling in a big way and failing to profit from the post-Covid bounce. I also understand that the news that the Chewy founder and now GameStop Chair Ryan Cohen has taken a nearly ten percent stake in the company and is pushing for change is a big deal, but does it warrant a jump of over 100% in the stock? On the surface, no, not unless the stock was massively undervalued before it doubled. The very fact that news of a potentially divisive move by an activist investor can cause such a massive move tells you that that it was.
The big move in BBBY has happened now, making it too late to take advantage of that overdone decline, but its magnitude has me looking around for other stocks that have been sold off to a similar degree based on conventional wisdom, where a change in the narrative could prompt a big retracement at any time. To me, the most obvious among them is Boeing (BA).
Boeing has definitely been the victim of a negative narrative or, more accurately, multiple negative narratives. Last year, as the pandemic lingered, Boeing’s commercial airplane business was hit hard. After recovering somewhat from the initial hit from Covid, airline passenger numbers fell again as Omicron raged around the world. Then, just as the variant’s hold was broken and a return to “normality” became a possibility, the narrative around Boeing switched. The supply chain issues that we heard so much about weighed on the stock, then worsened as Russia took actions that made its exclusion from the world’s economic order look likely.
It goes without saying that lower passenger numbers translate to lower new aircraft orders, and that higher input costs taking hold as that unfolds adds to the problems. On that basis you could say that BA’s 36% drop over the last year is justified. However, some of the greatest long-term opportunities come when short-term, navigable difficulties force a stock to the point where long-term prospects are ignored. BA is at that point.
The once inconceivable time when Covid’s impact on commercial airline traffic is over is now clearly visible, but a new problem is dragging Boeing’s stock ever lower. Russia is such a massive exporter of raw materials essential to aircraft manufacture that supply disruptions are inevitable now that Putin has chosen to place his expansionist aims above economic considerations. Prices in things like aluminum and titanium have reflected that over the last few weeks.
That price pressure is more of a problem than the fact that Boeing have announced that they will suspend titanium purchases from Russia, news that is pushing the stock lower again this morning. The company states that they have enough reserve supply and diverse sources of titanium to continue uninterrupted production, but that doesn’t seem to matter right now. “Bad” news is causing selling all the same.
Plain common sense should tell you that while the problems Boeing is facing at the moment are real, they are also temporary. The commercial aviation industry will recover, and when it does airlines will face an urgent need to replace aging planes. At the same time, commodity prices will drop back once the short-term disruption is over because they always do. When those two things meet, Boeing will have a growing order book and serious pricing power and the stock will bounce back. That may not happen immediately, so buying BA is definitely a long-term play that may involve some short-term pain. At some point, though, we will all look back and say, “Why on Earth was Boeing ever down there?” and it makes sense to begin preparing for that time by nibbling at the stock on the way down.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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