Pop quiz: What’s this year’s best-performing blue chip name in the Dow Jones Industrial Index? If you guessed tech giants Apple Inc. (NASDAQ:AAPL) or Microsoft Corporation (NASDAQ:MSFT) — close, but no cigar. The former is up 15% since the end of 2017, and the latter has gained a respectable 20%.
The right answer is, amazingly enough, Boeing Co (NYSE:BA). BA stock is leading the Dow with its year-to-date gain of 26%, after reaching a record high just a few days ago — a feat made even more amazing given that Boeing has been pegged as the name with the most to lose should a trade war break out.
Is it possible investors recognize all the trade war fear-mongering is strictly a politically-driven activity, with all this talk of tariffs just part of a negotiation strategy? In a word, yep. But, there’s still an ironic concern for Boeing newcomers.
BA Stock Isn’t the Company
Giving credit where it’s due, celebrity stock guru Jim Cramer called it on Wednesday when he explained that the incredible rally from BA stock since March is a “terrific sign” that nobody really thinks a trade war is in the offing. He added “there are literally a dozen airline purchasers who would love to get in the queue if China drops out, and that’s despite the recent declines in the airline stocks because of (a) 50 percent increase in the price of fuel.”
In his words, booya.
And yet, to strategic-minded investors who understand the market works in mysterious ways, Boeing stock isn’t a buy right now even though the analyst community has increasingly said it is since late last year.
Too overbought for its own good? In a sense, yes, that’s a liability for Boeing shares here, though it’s more of a symptom of the problem than the problem in and of itself. Rather, BA stock is an at-risk name because the sentiment surrounding it has become dangerously bullish.
Too Much Optimism
Hear the thesis out before scoffing.
Yes, the long-term outlook for Boeing is impressive. The company believes the airline industry will need more than 41,000 new aircraft between now and 2036 to meet growing demand. For perspective, there are about 23,500 commercial jets in use today.
And yes, Boeing has been racking up orders left and right, with 333 new orders placed this year, bringing the total number of so-far-undelivered orders to nearly 6,000. The company is also, to put it bluntly, is kind of embarrassing rival Airbus SE/ADR (OTCMKTS:EADSY).
There are limits, however, engrained deep in the back of investors’ and analysts’ minds. We may be reaching them soon, if we haven’t already.
Several objective pieces of data point in this subjective direction, although three stand out among them. One of them is the sheer lack of short interest in BA stock right now.
A short trade is essentially a bet against a stock, with the aim of selling it — even if you don’t yet own it — with the aim of buying it back at a lower price at a later date. But the masses tend to get things wrong when using short trades. Short interest was at a multi-year high in mid-2016, right before a huge rally began to unfurl. Now the inverse is likely. Short interest of less than six million shares of BA stock suggests traders are now too confident in the stock’s foreseeable future.
Option traders — arguably a more advanced trading crowd — are also unusually optimistic. The number of put options (bearish) being bought versus the number of call options (bullish) has been trending lower for a while, but has tiptoed into multi-year-low territory this month.
Last but not least, even analysts may be getting a little overzealous with their expectations. The current collective “Buy” rating — a score of 2.0 on a scale where 5.0 is a “strong sell” and 1.0 is a “strong buy” — is the highest it’s been in years. The stock’s target price changes also seem to suggest there’s a bit of a “who’s going to suggest the highest one?” contest going on within the Boeing analyst community right now.
Bottom Line for BA Stock
Is it possible all these traders, ranging from amateurs and professionals, are ultimately right? Sure, anything’s possible. It’s also worth noting that they can be right with their long-haul outlooks, while BA stock still takes a short-term tumble.
Indeed, that’s the key point being made here. The stock has been red hot lately as a result of justified optimism, but perhaps got a little ahead of itself. Long-term investors could step in here, but doing so may well get them in at a rather well-pronounced short-term high.
The crowd has a way of being wrong when they think they’re the most right.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.