Good companies are hard to sell. While stock performance is obviously the main reason investors take positions in equities, it always feels a little better when you get a strong return in a true American company like a Ford (F), GM (GM), or Boeing (BA).
Today, as many of these troubled American companies like Boeing have put some of their biggest past struggles behind them, and their share prices have rallied significantly, I think it is still important to reassess your portfolio and positions you have held since the now nearly six month rally has taken the S&P 500 (SPY) up over 30%
Few companies' earnings and backlogs have held up as well as Boeing's over the past year. While a down economy has hurt the airline business, fuel prices have remained high and demand for new commercial planes has remained strong. The airline leasing market has also remained strong despite the economic weakness since leasing rates are often tied to the very low libor rates, and banks have been surprisingly willing to lend to even the most cash strapped airline companies like American.
What is interesting about the very strong backlog and order book that Boeing and other aviation companies like Airbus have, is that their business has been almost too good.
While obviously the economy is improving and air traffic is likely to pick up as global commerce increases, these companies have shipped massive amounts of planes already. Boeing also just came to market with their most hyped new model airplanes in many years with the Dreamliner.
This is why I found the recent and repeated comments of some in the airline leasing industry so interesting. Aercap (AER), one of the biggest airplane leasing companies in the world, backed by the Abu Dhabi investment fund, recently warned of a huge glut of airplanes coming onto the market.
Obviously despite the moderate recovery we have seen in the U.S. and global economy, economic growth levels remain tepid. Interest rates have also remained at historically low rates during this now nearly three year period.
In times like these, after the market goes through significant rallies, I think it is important to find companies whose earnings are moderately or significantly tied to the artificially low rate environment that undoubtedly will not last forever.
While Boeing is undeniably a strong company that likely will have many good years ahead of it, the comments from companies in the industry suggest that many airline companies may accelerate their orders of new airplanes (that they were previously planning to order over extended periods of time) to take advantage of the favorable leasing market.
Obviously, whether a plane is leased or owned by an airline company that takes delivery, companies like Boeing and Airbus record the delivery of the plane as a sell since they are not the lessor.
Finally, while I strongly think investing should be done exclusively on a fundamental basis, I think it is interesting to note the fairly significant margin that Boeing has lagged behind the S&P 500 by over the last three months.
Not only has Boeing lagged the S&P 500 by double digits during the last three months, the stock has gone nowhere during that period of fairly positive news for most markets. While relative underperformance by a stock or sector for a short period of time is often meaningless, given that Boeing's rally from the mid-fifty dollar level to today's nearly $75 dollar price level has been stronger than that of most of the broader U.S. indexes, I think the stock's underperformance is noteworthy.
To conclude, while Boeing is undoubtedly a great company with many great years ahead of it, the company may have seen their best years for some time to come. With even the more dovish Bernanke likely to raise rates sometime in the next couple years and air traffic increasing only moderately, this stock may be a name to take profits in for the next year.