Stocks to sell

In early 2019, shares of airplane manufacturer Boeing (NYSE:BA) dropped sharply after a software error caused two of its 737 MAX planes to crash. Since then, journalists and analysts alike have a taken a deeper look at Boeing, and some have concluded that the problems at Boeing spread far beyond this supposed isolated software error. These reports haven’t looked good for Boeing stock.

boeing stock BA stock

Most recently (and notably), the New York Times reported that the culture of Boeing is one that has often “valued production speed over quality.”

Boeing said the story is skewed and inaccurate. Nonetheless, it is yet another headwind which is weighing on BA stock. All in all, Boeing stock is more than 15% off the all time highs it was trading at prior to the 737 MAX scandal.

Zooming out, Boeing’s production quality issues in 2019 remind me a lot of the data privacy issues that stung Facebook (NASDAQ:FB) in 2018. In both cases, there was an isolated event which sparked a deeper look at company culture. That deeper look revealed some troubling truths, investors freaked out, and both stocks dropped.

Ultimately, though, Facebook’s bottom-line wasn’t hurt much by its 2018 data privacy headwinds. Similarly, Boeing’s bottom-line won’t be hurt much by its 2019 production quality headwinds. Long term, that means Boeing stock will inevitably rebound from this 2019 sell-off, much like FB stock has rebounded from it’s 2018 sell-off.

At the same time, FB stock dropped a lot and for a long time in 2018 as the company navigated through numerous data privacy headwinds. The same should be expected of BA stock. As such, while the long term outlook for BA stock still looks good, the near term outlook does not. Investors should expect a bumpy flight so long as production quality issues remain front-and-center.

Boeing Looks Like the Facebook of 2019

In broad terms, I think Boeing’s situation today looks a lot like the situation over at Facebook back in mid-2018; while Boeing will rebound from here in the long run, things will probably get worse before they get better.

This comparison has a few key characteristics. First, headwinds were sparked by a supposed isolated event. For Facebook, it was the Cambridge Analytica scandal. For Boeing, it the was the 737 MAX crashes.

Second, fears spread across mainstream media that those isolated events were not so isolated. In the Facebook scandal, mainstream media kept running with stories about how Facebook emphasized profits over personal security. In the Boeing scandal, mainstream media is running with stories about how Boeing has emphasized speed and profits over production quality.

Third, regulation threats loom large in each case. At Facebook, the threat of data privacy regulation kept investor sentiment depressed for a long time. At Boeing, multiple investigations have been launched into the FAA airplane approval process.

Fourth, both companies have suffered from paused demand. At Facebook, multiple big customers pulled their Facebook ad spend budgets. At Boeing, multiple customers have pulled orders for 737 MAX planes.

Fifth and perhaps most important, neither company’s bottom line will be impacted in the long run. Facebook saw its margin squeeze in 2018 as the company invested more in data security. But, that was the extent of the negative impact, as users didn’t leave, advertisers didn’t leave in bulk, and revenue growth remained robust.

Boeing may likewise see its margins squeeze in 2019 for various reasons. But, those headwinds will pass, and Boeing will come back to robust profit growth in 2020.

Ultimately, because of these common characteristics, I think it is safe to say that Boeing is the Facebook of 2019.

Boeing Stock Has Further to Fall

The comparison to Facebook is long-term favorable, near-term unfavorable of Boeing stock.

In the long-term, it broadly means that Boeing’s profits ultimately won’t be impacted much by production quality headwinds, and that these headwinds will ultimately pass with time. Thus, Boeing will rebound in a big way from this sell-off, much like FB stock rebounded in a big way from its 2018 sell-off.

In the near-term, though, the outlook is less favorable. FB stock dropped in a big way in 2018. Much more than Boeing has dropped in 2019. To be exact, FB stock fell more than 40% peak-to-trough in 2018. BA stock has dropped just 15% peak-to-trough in 2019.

To be sure, that could be a function of Boeing’s issues being less severe than Facebook’s issues. I’m not sure I agree with that, I do understand that argument. Nonetheless, the FB sell-off lasted five months from July to December. The sell-off in BA stock has lasted for less than two months.

In other words, I don’t think this sell-off in Boeing stock is over just yet. The media remains hyper-focused on Boeing’s supposed production quality issues, so much so that it’s still front-page news.

So long as that remains true, investors will have a tough time putting a sustainable bid under BA stock, much like investors had a tough time doing that for FB stock in 2018 so long as Facebook’s data privacy issues were front-page news.

Thus, until mainstream Boeing media coverage becomes less negative, I’d stay away from BA stock. Things will likely get worse before they get better.

Bottom Line on Boeing Stock

Boeing’s 2019 production quality issues look very similar to Facebook’s 2018 data privacy issues. That’s a long-term favorable comp, since FB stock ultimately rebounded as the headwinds passed and profits were marginally impacted. The same will be true for BA stock.

But, the near-term implications aren’t as favorable. FB stock remained weak in 2018 so long as Facebook’s data privacy issues remained front-page news. The same will be true for BA stock. Right now, Boeing’s production quality issues remain front-page news. Until that is no longer true, BA stock will fail to stage a meaningful comeback rally.

As of this writing, Luke Lango was long FB.

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