Boeing: Buying The Bottom

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About: The Boeing Company (BA)
by: Tom Lloyd
Summary

Bottom fishers are the really smart investors.

They come in at the bottom and sell at the top.

They have to see the turn-around before everyone else.

They have to ignore all the bad news and sell signals.

They are highly respected on Wall St.

So you want to be a successful investor, well then practice bottom fishing with a stock like Boeing (NYSE:BA) where there is nothing but bad news and sell signals short term. Everyone knows the stock is bottoming. Only the few know where the bottom is and when to buy. Are you one of these pros?

This is an update to my first attempt at spotting the bottom for BA. You may want to read my first article. BA has gone lower since finding its first support around $360. Our fundamental/technical signal was a Hold and now it is a Sell. All bottom fishing is done on stocks that have our Sell signal. We like to wait for the breakout off the bottom, when our signals start improving. That means we miss the exact bottom, but it saves us from the angst of having money parked in a stock while it continues to test the bottom as BA was doing these past few months.

Investment Thesis

Our thesis is that BA will hit bottom after the July earnings report. It will start its bounce just before the regulators approve the 737 Max for flights. The market will know that before it is ever announced, so it will show up on the chart before the announcement. One airline is planning on flying their 737 Maxes in October. My guess, based on that, is the regulators will approve the fix in August. BA would love to announce some good news just before or after July earnings. The Brits just bought 200 planes and that will increase the backlog nicely. BA trades on backlog, not on current deliveries, but shocking earnings news will take it down as daytraders pound it. Then the analysts and portfolio managers will take it back up based on backlog and 2020 earnings. Let's look at the fundamentals and technicals to see how this may play out.

Fundamentals

Our starting point is always to find out what the analysts are saying and then check the fundamentals to make our own decision. This is what professional portfolio managers do. They pay the analysts big bucks for their research. We get it for free, but the portfolio managers have it before our free research. After all, someone has to pay the $500,000 salary of the analyst. Besides we don't need timely information because we don't need to catch the exact bottom.

According to SA's analyst ratings, 14 out of 23 analysts are favorable about BA and the consensus, 12-month target is $426. Let's assume that we are looking for a 20% gain, so that would mean the analysts expect BA to be trading less than $426 right now. Let's say $360 support which might give us a bounce to $432 in 12 months. BA is now trading at $350, close enough. That consensus target seems reasonable. Of course we would like to buy BA cheaper at $330 or $340 after July earnings.

Yahoo shows 14 out of 25 analysts favorable, rating it a consensus, weak buy. The consensus target is $420. Yahoo also shows that 2 analysts with Sells a couple of months ago, have now disappeared and that is an improving analyst view. Sell-side analysts hate to issue Sells and Holds are an easier way to be bearish for a widely held stock like BA. Portfolio managers want outperforming stocks, not Holds that are under-performing the Index. Only the really good ones will do any bottom fishing. Most will wait for the first good news from analysts to start buying, otherwise known as the "first call." The portfolio managers really have to pay up to receive that first call from the best analyst on Wall St. When the portfolio manager takes that call and starts buying, we will see it on the chart.

Speaking of portfolio managers, let's see what they are doing. Nasdaq shows that 2,225 institutions own 68% of the stock and were sellers, on balance, at last report. That does not mean it's a sell. It just means that they are selling more stock than they are buying. That does not help the price any. Of course, automatic Index buying of BA, devoid of any fundamental research, does help the price and money is constantly pouring into Indexing as this market moves higher. As we can tell from the downward movement of price in BA, there is more selling than buying. We, of course, want to catch that reversal when it happens.

Now that we know what the analysts are saying and what the portfolio managers are doing, it is time to look at the fundamental metrics and come to our own decision. In my last article, I noted that the earnings forecast was $20.21 for 2019. I decided to give it a 10% haircut and came up with $18. That gave me a target of $378 which I discounted to a current implied price of $320. BA was trading at $375 when I came up with those numbers. Let's update them.

Yahoo is currently showing the 2019 earnings estimate to be $14.62, so my $18 was too optimistic. However, the market will be looking at next year's estimates and that is at $22.64. We will have to see how that number holds up after July earnings, if the 737 Max is back flying in Oct. and deliveries return to normal. Valuing that $22.64 at a P/E of 21 gives me a target of $475 for 2020.

Now let’s go to Finviz, glance at the chart, check the fundamental metrics, as well as the latest analyst post and latest news and blogs, including a feed from SA.

As with all bottom fishing candidates, the chart is a disaster, showing a downward spiral in price, looking for a bottom. The 50-day moving average, broke below the 200-day moving average and that is called a "death cross." When value playing, bottom fishers find a stock they like, it usually has this death cross signal in place.

Finviz fundamental metrics show why this is a value play at the bottom. The forward P/E compared to the lagging P/E is very attractive. The P/E vs. Growth or PEG is extremely attractive. The price vs. free cash flow is also good. These fundamentals are going to be attractive to the value players, and bottom fishers. The only remaining question is where is the bottom? Professionals don't try to catch bottoms or tops. Most bottom fishing, value players will be in before the bottom, because they are buying in size and can only do that as price goes down to the bottom. Of course they have to be convinced that price is going to bounce substantially higher from the bottom and that this is a long-term investment. Boeing meets all of those criteria. However, BA is already widely held. The bottom will only attract those value players who stayed out of BA because it was overvalued. The bottom changes that calculus for the value player.

Earnings are due July 24th. The consensus is $1.81 and revenues of $21.57 bil.

Technicals

Here is our chart showing the technical signals. Technicians will not buy until these signals improve. The only way these signals will improve is when the bottom is in place, because the bottom fishers are buying and price is no longer going lower. Then any good news will lift price off the bottom. As BA starts to outperform the market again, portfolio managers will put it back on the buy list and will start adding to their existing positions. The stock will be on its way to that 2020 target and everyone will know it.

BA weekly

Conclusion

We think the bottom will occur after the July 24th earnings at around $330. We expect that the approval of the fix by the regulators will confirm that the bottom is in place. We expect that when flights resume, price will move higher off the bottom, ultimately reaching for the 2020 target which we think is $475.

Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.

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