There are some stocks that I consider buying on every dip, and Boeing (NYSE:BA) stock is one of them. But I wish the latest opportunity was under different circumstances.
Boeing stock is down after the crash of a Boeing 737 Max 8 Jet. So many lives lost … our thoughts are with the families.
With emotions still running high, many investors are wondering how to approach BA stock now.
The actual decision to buy the stock on a dip should always depend on one’s time frame and portfolio balance. If the intent is to own BA shares for the long term, then timing is not crucial since BA will be higher later. But a 10% drop on a headline is definitely an opportunity to consider.
On Monday, Boeing stock fell 12% on the headline that there could be a problem with a version of the 737. Some airlines even grounded the planes just in case the problem is systemic. While the dip was scary to those long the stock, it only closed down 5%, so the bulls bought it up off the lows. This morning, it’s down again, but still off the low it set on Monday.
Now we await more news from the FAA as they examine the black box, so it remains in headline mode. The direction of the next move will depend on the news from that front. If the investigation determines that there is no systemic issue with the plane, then the stock will rebound fast. BA stock could even set new highs soon thereafter.
However, there still is a chance that there is indeed a problem that requires extensive repairs thereby hitting BA’s P&L hard. In this scenario, there definitely will be more downside in BA’s future.
So why is it a sure thing in the long term? History suggests that this too shall pass and the proof is in the price action. Even after the massive dip on Monday, BA stock is still up 24% year-to-date, 120% in two years and up 225% in the last five.
Furthermore, an ideal stock to own is one of a company that has a technological advantage, long-term visibility over the fundamentals and most importantly, a large hurdle for new competition. BA ticks all these boxes and more.
Moreover, this is still a cheap stock in absolute and relative terms. Boeing stock sells at a trailing price-to-earnings ratio of 21.
From all angles, one thing is clear, buying BA long here has value below for support.
Also, this management team is proven over decades of tests. They really only have one competitor in Airbus, so there is enough room for both to exist without either threatening the other’s prosperity. The risk of getting a substantial, new competitor is near impossible. We will not see a Tesla (NASDAQ:TSLA) emerge in the industry, delivering monster jets.
Bottom Line on Boeing Stock
As a result, BA has a sales backlog that extends to a decade. So the fundamentals and the P&L should remain pristine for at least that long. This is what makes it an exciting stock to be long in. On dips, these unique fundamentals act as a put below, thereby limiting the disaster business scenario.
For the last few months, BA stock has been hostage to the tariff headlines and fears that China will stop ordering planes from the U.S. These fears are overblown since there is no alternative to BA. So if China wants to own more planes, they most likely need BA for that. Global capacity is limited as it is and if it drops out of the Boeing sales pipeline, China risks falling back in the cue to delivery.
Sometimes the threatening headlines that cause temporary grief become catalysts soon after the threats are over. So in this case, if and when we get an official tariff deal between the U.S. and China, I bet that this will reignite the buyers in Boeing stock.
As for the threat from this situation, it is encouraging that the FAA said it sees no reason to act yet before they analyze the data from the disaster. This means that there is nothing obvious yet, but the threat of headlines still looms for a few more days or weeks depending on the speed of the investigation.
In fact, just last night, the FAA announced that BA will make enhancements to the 737 in question by April. So the issues at hand could end in as little as a month.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
