Boeing (NYSE:BA) stock, the largest component in the Dow Jones Industrial index, tumbled on Monday. In fact, BA stock is down about 7% since May 6 when President Trump’s tweets made Wall Street realize that the U.S. was not likely to sign a trade deal with China any time soon.
Many investors are understandably getting nervous as to where the stock markets may be headed next. Therefore, today I’d like to discuss the short-term outlook for Boeing stock.
Don’t Bet Against Boeing
As the manufacturer of commercial and defense products, the company is one of the most important names in many portfolios. Long term, I would not bet against Boeing, the single-largest American exporter.
Short term, though, things are likely to be choppy and somewhat of a mixed bag. A couple of sour trade headlines or Boeing 737 Max 8-related news in the next few weeks could drive BA stock further down.
China Trade Wars
Boeing and its main competitor Airbus (OTCMKTS:EADSY) are the world’s two largest commercial aerospace manufacturers. Over the past decade, the growth of China’s airline industry has created a massive export market for Boeing. In fiscal year 2018 alone, Boeing generated about $13.7 billion in revenue from world’s second-largest economy.
As the U.S. has accelerated the tariff campaign over the past few days, Wall Street is now expecting China to decrease its orders of Boeing planes. However, not all analysts are overly pessimistic as they believe China needs to purchase Boeing equipment to support growth in the industry.
BA’s general strength globally translates into market leverage, pricing power and substantial free cash flow, which should translate into strong shareholder returns. Yet the unique combination of political and economic circumstances are now adversely affecting both the stock valuation and investor sentiment.
Stocks suffer during times of uncertainty. Therefore, I’d encourage potential new investors to wait for several weeks until the smoke clears from the markets and until buyers are definitively back in control on Boeing shares.
Furthermore, the U.S.-China trade issue is only one of the most important reasons the BA stock has gone on sale. Boeing has another important problem at hand.
BA Stock and the 737 Max 8
So far May has been about the effects of the trade war on companies and their respective stock prices, including BA. However, the Boeing stock price has been falling since early March, when Ethiopian Airlines suffered a fatal accident involving a Boeing 737 Max 8 aircraft.
The March 10 crash was, unfortunately, the second deadly incident of the same model plane, one of Boeing’s most popular, in less than six months.
March shaped up to be tough for BA stock. Following the tragedy, countries closed their airspace to Boeing’s 737 Max 8 one by one, until finally the U.S. Federal Aviation Administration (FAA) also grounded the top-selling jets through May. It’s likely that the grounding may continue through the summer.
The present concern regarding the safety of Boeing’s 737 Max planes offers plenty of questions. In early April, CEO Dennis Muilenburg admitted a crash link to software error. Preliminary reports also suggest a technical issue stemming from Boeing’s anti-stall software. Later in the year, if Boeing is found to be at fault regarding pilot training or if the company cannot fix the service or hardware problems completely, BA stock will suffer further. Boeing has to also rebuild customer and passenger confidence.
Several analysts have downgraded BA stock, highlighting concerns over the reasons behind the accident and urging investors to not rush into the shares until the investigation results become public. Boeing still faces billions in liabilities that will also affect earnings estimates.
So, here is yet another reason to wait before investing in Boeing stock. How long? I’d say hold off until the release of the full crash reports as well as BA’s next quarterly statement in July to re-evaluate the impact of the crashes on the balance sheet.
Technicals Guide to Sell
Investors who pay attention to short-term moving averages and oscillators should note that BA’s current technical message is a “sell.” After the brutal sell-off since early March, Boeing stock has suffered from a damaging technical picture and the trend is down.
Since May 6, BA stock, like many other names in the broader market, has been further hurt by the ramping rhetoric of the U.S.-China trade wars. the shares staged a relatively strong come back on May 10 only to reverse the rally on May 13 when it fell almost 5% on the day. Then yesterday saw the stock regain ground again. This morning in pre-market activity, Boeing stock is off less than 1% in line with the broader future indicators.
I believe the volatility and selling in the markets will continue in May. As many investors now see the moves in Boeing stock as a proxy for developments in the trade negotiations, sizeable daily stock price swings.
Depending on news headlines, BA stock may trade sideways for several days, only to continue to pullback toward the low-$320’s level, where it is likely to find initial support.
If the support around $320 level does not hold, then it may fall further to $300 level, where I’d expect BA stock to start to stabilize and then trade sideways until the next earnings release in late July.
Indeed, Boeing stock may become one of the first major stocks to test the lows it saw around $290 in December 2018, hence making a double bottom in technical charts. Only then the twice-touched low may become a more reliable long-term support level.
In short, further selling pressure might simply happen due to either broader market issues, especially regarding U.S.-China trade wars, or due to Boeing issuing another negative investor alert as a result of the recent aircraft accidents.
If you are looking for an entry signal to buy BA shares, from a technical chart perspective, I am not expecting the stock to make a significant leg up any time soon. Boeing stock will need to stabilize and build a base again before a long-term sustained leg up can occur. Expect nearer-term trading in BA to be choppy at best.
Where BA Stock Becomes a Buy
In the coming weeks, I would be a buyer of BA stock around $320 or even lower, at about $300. I’d also expect the company to authorize stock repurchases around $300 level, a move that would support the stock price.
If you already own shares of Boeing, you might want to stay the course and hold your position. That said, if you are worried about short-term profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current price point, to protect your profits to date.
If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon. In that case, you may, for example, buy 100 shares of BA at a limit price of $343.2 and, at the same time, sell a BA Jul 19 $345 call option, currently trading around $15.78.
The $345 option offers some downside protection in case of volatility and a decline in BA stock. This call option will stop trading on July 19 and expires July 20. As Boeing is expected to report earnings on July 24, you would have enough time to reassess the market conditions and your expectations regarding the stock after the expiry of this call option.
I would not advocate bottom-picking in case of near-term price weakness. Yet, I find BA stock to be a buy candidate as the price declines toward $300. I’d expect long-term shareholders to be rewarded well within 3-4 years. Meanwhile, they’d receive a current dividend yield of 2.44%.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.