Boeing 787 Fire Shows Peril Of Individual Stocks

Includes: BA, VIS
by: Emmet Kodesh

On July 12, the S&P closed at a new high of 1680. Despite a slight pause or, in the case of most PM (precious metals) miners, an unsurprising 2-3% retracement (on very light volumes) after Thursday's surge of relief (S&P to 1675) at Dr. Bernanke's statement that the economy still needs QE, most issues were positive. The sectors which I have recommended this year, health care (NYSEARCA:VHT), consumer staples (NYSEARCA:VDC) and discretionary (NYSEARCA:VCR) because of organic economic problems, again outperformed.

There was, however one large cap company that varied greatly from the market's pattern of modest gains or losses on light-average volumes. Boeing (NYSE:BA) caught many eyes as it plunged on 9x normal volume (44 million shares traded while average volume is 4.86 million shares) and down 4.76% to $101.79/ share, a loss of $6 billion market cap on the day. The reason for the massive, panic-selling in BA makes the case for avoiding or minimizing ownership in individual stocks in favor of using diversified mutual funds or ETFs.

The catalyst for this hasty sell-down was a fire in a Boeing 787 Dreamliner parked and empty on the runway at Heathrow in London. Centered in the tail (vertical integrator) of the plane, the fire was not near the two battery compartments beneath the wings and under the cockpit. Overheating in the technically innovative lithium-ion batteries early in the year prompted a 3-month grounding of Dreamliners and re-design of the battery units with new safety features. Made mostly of plastics and carbon fiber derived from new graphite technologies, the plane is 20% lighter and stronger than aluminum and uses less fuel. There also have been issues with its tracking system, oil filters and computers though no injuries have resulted. The Dreamliner arrived three years later than planned and it is under intense scrutiny. The problems garner attention and concern as it utilizes a new stage in technology and sixty-six 787s are in use with 864 on order.

After problems or apparent problems from Poland to Japan to Seattle, with four incidents in a ten-day period in late June, at this point any concerns about the plane, even when unrelated to earlier issues and not apparently of serious structural nature will tank share prices. Adding to the pain, in an unpleasant coincidence another Dreamliner headed for North America had to return to the airport in Manchester, England for reasons unspecified at this time. Boeing lost $6 billion market cap from the July 12 news and individual investors surrendered hundreds of millions of dollars, perhaps for little reason. That's what happens when you've got a lot riding on one nag.

The incident contains a message about the intrinsic peril of owning individual stocks of all but the soundest and simplest companies. But even McDonald's (NYSE:MCD), Coke (NYSE:KO) or Johnson & Johnson (NYSE:JNJ) can take a hit on a quarter of bad y/o/y earnings or an uproar about some health issue whether or not it is well-founded.

As an alternative to owning shares of BA or any equity, a more cautious investor would own Boeing through a fund like Vanguard's Industrial ETF (NYSEARCA:VIS). Trading at $85.29 and near the top of its 52-week range ($64.33 - 85.67), VIS has BA as the sixth largest of 351 holdings. It is not a thinly spread fund for its top ten holdings constitute 40.2% of the ETF with BA accounting for 3.2%. The top ten include mega-cap and world-moving General Electric (NYSE:GE) at 12.6% of total holdings (GE made the Dreamliner's engines), United Technologies (NYSE:UTX), United Parcel (NYSE:UPS), Caterpillar (NYSE:CAT) and Union Pacific (NYSE:UNP). VIS was off a fractional .38% Friday after hitting a yearly top so those who own Boeing through it were feeling no pain and likely unaware and with no need to be aware of the fire and resultant panic in BA shares.

Note that VIS has been powerful YTD and in the past 52 weeks has risen 33.1%. This grouping of major mixed industrials involved in construction (8.8%), aerospace and defense (20.5%), electronics machinery and transportation suggests that many things are good with the economy at least as viewed through the major companies in this sector ETF. VIS yields 1.78% (similar to that of BA) and also is available as a mutual fund with the same holdings and weightings. Both have Vanguard's typically rock-bottom expense ratio, in this case 14 basis points ($14 fees/year per $10k invested).

Some investors may prefer to hold major companies like Boeing, UTX, GE or UNP in such ETFs which allow for easy trading. Those already on Vanguard's platform can buy or sell any amount of shares at no cost. There always is the option of buying an additional position in one or several of the component companies on this or any ETF while still having one's main wealth in the diversified fund.

Structural challenges in all major economies plus the all-inclusive move toward a new world reserve system with multi-valent trading facilities will add volatility to markets as may the high probability of black swans or shifts in shaky fiscal policies. Thus the ETF or mutual fund approach to investing, at least as the core of one's holdings, is appealing and essentially defensive for many people at this transitional period for all things economic.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.