Three powerful biases are preventing many investors from seeing the long-term value of the airlines industry in general and Boeing (NYSE:BA) stock in particular. That situation is also a major reason why the jet maker’s shares have not recovered much in the last few weeks, even as the stock market curbed losses.
BA stock was down almost 7% last week versus a 2.3% decline in the S&P 500 index.
One bias is rooted in geography and media coverage. Specifically, people who live or work in New York or New Jersey and those who rely on overly pessimistic media for most of their information are likely to believe that the pandemic has left everyone petrified by fear and that no one could ever possibly want to fly until a vaccine is found.
And that makes sense. After all, media outlets like CNN, The New York Times, and, to a certain extent, CNBC, always seem to emphasize how deadly the novel coronavirus is while downplaying factors that would make it less terrifying for people. Among the latter points are the fact that its spread is likely to decrease greatly in the summerr and that healthy people under 45 have an extremely low chance of dying from it.
The geographic bias makes sense as well. After all, the outbreak is much worse in the Empire and Garden states than anywhere else in the country. I recently spoke to a friend who lives in Manhattan; he said that most people rarely venture out of their apartments, even for a walk by themselves, while even many grocery stores are closed.
The situation could not be more different in the Dallas suburb where I live; there are plenty of cars on the roads and when I went to a restaurant recently, about 15 people were eating either in its dining room or outside.
Even Buffett has Biases
I think those biases likely played a role in Warren Buffett’s decision to sell his airline stocks, a move that dragged down the entire sector, including Boeing. Buffett, who’s almost 90, relies a great deal on the opinions and research of his advisors, including Bill Gates. And there’s a good chance that many of those advisors have roots in the New York area (the financial capital of the world) and read media outlets like The New York Times and CNN. So Buffett’s decision to sell all of his airline stocks may very well have been heavily influenced by the two biases I described.
The third bias is based on aid that the airline sector is receiving from the government. The carriers have already received billions from Washington and may need more in the fall. For its part, Boeing is considering applying for government aid.
As a result, it’s obviously in the companies’ interest to say that their outlook is quite bleak. After all, if the airlines and Boeing will definitely be okay, why do they need aid for the government, some conservatives in Congress and the Trump administration could ask.
Given that reality, I’d take the much-publicized statement by Boeing CEO David Calhoun that a major airlines “most likely” will go bankrupt with many grains of salt.
Green Shoots for Airlines
“But the fact is in the Midwest and Mid Atlantic, the Upper West, I got to tell you they don’t share the opinion that the evening news is putting out there.” — Allegiant CMO Scott DeAngelo describing the results of customer surveys
In other words, in those areas, many people are no longer tremendously afraid of the virus. And Allegiant reported that queries to its website are trending up, as well as “an uptick in bookings for select markets over the past few weeks correlated with beaches opening on Florida’s West Coast.” Further, as I’ve predicted previously, the airlines say that there’s a correlation between economies opening and ticket demand returning.
That trend has already been playing out, as the number of people passing through TSA security on May 7 was more than twice the total tally of people who went through the checks a month earlier. Although air traffic is still down more than 90% year-over-year, the situation is clearly improving. And as more economies open and the virus’ spread decreases during the summer, the rebound should greatly accelerate.
Not coincidentally, in a trend that should greatly benefit Boeing, many airlines around the world are starting to return many more of their planes to service. Ryanair (NASDAQ:RYAAY) is expected to jump from 10% utilization of its planes this quarter to 40% in the third quarter, while Air France-KLM (OTC: AFRAF) is surging from 5% to 20%. In Q4, IAG Group — operator of British Air and Iberia, among other carriers — is expected to jump to using 70% of its planes, while Air France will jump to 60%.
And of course, if a vaccine is administered, as renowned investor Bill Miller recently pointed out, people will resume flying in droves. (Dr. Anthony Fauci, who’s not optimistic about much, is upbeat about a vaccine, so there’s a good chance that one or more may indeed work.)
And at that point, of course, Boeing’s stock will jump.
Bottom Line on Boeing Stock
The reality is that many people will start flying soon, and that the trend will likely only accelerate this summer and in 2021.
Meanwhile, Boeing’s shares are trading 65% below their February highs, compared to the iShares U.S. Aerospace & Defense ETF (BATS:ITA), trading 38.4% lower. The exchange-traded fund has BA stock at a 10.7% weighting of its 36-stock portfolio.
Given these points, Boeing stock is worth buying for long-term investors.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.