In spite of the grounding of Boeing’s 737 Max aircraft having an impact upon the airline industry, as you don’t just pluck so many planes from the grid and not see consequences, this event wasn’t one that really has affected Boeing’s business all that much.
You wouldn’t know that though from seeing the way that the stock market reacted to the string of events that ensued, but in times like this, we always want to take a step back to gain proper perspective.
The way that investors perceive the value of stocks does go beyond where the bottom line is currently at, and Boeing’s 18% drop in price at its worst from these events sure is testimony to that. Boeing stock was doing great up until this event and was up a whopping 50% between December 24 and March 1.
This was a little too much too fast though, and the stock was in the midst of consolidating a bit before this recent plane crash. We might think that the stock was already overpriced before this though and this just brought us more in line, but it’s the people who may think it is overpriced that make the final decision here, not the overpricing itself, and this is important to keep in mind.
It doesn’t make sense that Boeing became worth 50% more in just a couple of months, or anything even close to that. While good business fundamentals can offer up a push here, it is the crowd that does the rest, and the crowd can take us quite a long way if it wants to, in both directions.
While giving back this much due to the crash and the groundings may also not make a lot of sense from looking at from a purely business perspective, this is the decision that the market rendered, and instead of just scratching our heads when these things happen, we can instead seek to understand them better.
This Fall Wasn’t Really About the Business
The people who sold their shares in Boeing in the midst of this crisis were probably not thinking very much about how this may affect business performance at Boeing, they were just looking to get out before things got worse. They may not have carefully considered what might happen when the dust settled.
Commentators at the time pointed out that this much of a loss does not make sense if we judge the value of this stock on Boeing’s expected business performance, which still looked pretty good. While we may expect a reaction of some sort here, a price that needs to be paid, because the events weren’t meaningless, this wasn’t the sort of thing we’d expect a stock to lose $30 billion in value overnight over.
Aircraft are extremely complex vehicles, and in spite of all the testing that is required before a new model can be put into service, there’s just some things that you don’t discover until later, like this. Boeing is a very capable company though and deals with all sorts of issues and problems when developing them, so correcting a software issue shouldn’t really be much of a problem, and it looks like it won’t be.
The incident did affect investor confidence, but it should not have affected it as much as it did, from an isolated incident. This is not to minimize the human cost of this, human lives and a whole lot of inconvenience, but stocks are solely concerned with the business, and this should have been seen as no more than a bump in the road for Boeing really, a little turbulence that would likely soon pass.
The real reason why this happened is that this broke the momentum of Boeing’s stock, at a time when investors were pretty zealous. Make no mistake, Boeing as a company is doing well, but they simply haven’t improved their standing anywhere near as much as the market gave it credit, and when this upward momentum got swept away, some of the price exuberance that we’ve seen lately went with it.
A stock comes under buying pressure essentially because people want to buy it, and the reasons why they want to buy it can just be seeing an opportunity that they can profit from. For instance, we could have seen Boeing start the year strong and jump on board and look to take advantage of the move, or if we are focused on the longer-term, buy it here because its price has been discounted from where it was before our little bear market of late 2018 happened.
We just might like the company and hear that their long-term prospects are good and invest purely on this expectation, where its current price really doesn’t matter because we’re told it will do well years from now.
The Conditions Are Ripe Here for a Continued Rebound
It’s usually the big guys that start this momentum off, where they buy the dips, and then the public joins in and buys it based upon the momentum that this bigger accumulation is causing. This describes the anatomy of a price move up a lot better than the bean counters could ever manage, because this really isn’t about how many beans are on the table, it is how many beans are being brought to it or taken away by investors.
We have a real tendency to over-react though, and this happens both ways, by people bringing too many beans to the game initially and taking away too many when the rally is over. Stock markets go through cycles like this all the time, even within the same day, like for instance the run-up of indexes on Friday from the jobs report, then seeing us give all of it back in the first hour of trading once the market opened.
We overvalued this initially we could say, although value isn’t that great of a term here, and it would be more accurate to say that we became stimulated in that direction. We get too stimulated, things eventually cool off and then the other side takes over, are stimulated, but they can get too stimulated too and we go back and forth like this continually.
When we look at Boeing’s stall and loss of altitude that recently happened, we do see that it wasn’t market momentum that caused Boeing’s stock to lose so much altitude so fast, this was more like when a plane stalls and it drops very quickly due to the air not holding them up anymore.
Of the two, it’s certainly preferable to just drop like this, rather than see a longer and perhaps more convincing display of negative investor sentiment.
We mentioned in a previous article how Boeing at the time was a very good bottom play for traders as well as a good value point for investors, although in this case it was recommended that even investors pay close attention to going below the low of the move.
The thinking behind this was based upon the assumption of the market over-reacting to all this, together with what appeared to be a reluctance to drive the stock down further. Things are going as planned, and while entering right now isn’t quite as nice as when we were just coming off the bottom, as the amount of risk involved increases, it still looks like a good play over the next while.
Investors really didn’t need to wait for the announcement that Boeing has identified the problem and a fix will be implemented very soon, as many expected this. When the problem gets fixed, we have to wonder if Boeing deserves to trade quite a bit lower than it did back on March 1.
It’s not about deserving though, this is much more a matter of people getting back on this horse, not that all that many people left, they just got stunned for a bit from this immediate drop in altitude. They are waking up now and their heads are starting to clear, and when they do, it’s more likely than not that Boeing will regain its ascent, and we can see some of this happening already.