Boeing Co (BA) Flying Off the Charts or Grounded in Reality? - BA - 80.2% - NewAgeAlpha Blog
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Boeing Co (BA)
Flying Off the Charts or
Grounded in Reality?
Boein
BA - g Co
80.2
%
H-Factor as of 06/30/2020.1
Boeing Co (BA)
Inside This Report:
The H-Factor System methodically identifies, measures and avoid stocks that erode returns.
We believe Boeing has the chance to erode your portfolio’s returns.
Boeing’s H-Factor is 80%. Thus, there is an 80% chance the company will not deliver the
performance to support the stock price.
Investors think in terms of picking winners, when their goal should be to avoid the losers.
We believe stocks with high H-Factor are more likely to be losers.
Other stocks in Boeing’s industry have much lower H-Factor. Consider replacing Boeing with a
more attractive alternative.
Inc. (HII)
Huntington Ingalls Industries
Sub Industry
16.8
Aerospace & Defense
)
OC
(N
rp
Co
Huntington Ingalls I... 11.6%
an
HII $ 167.5
m
G)
um
2.3%
D
Northrop Grumman Co 10.6%
(T
.1% op Gr
p
NOC $ 301.1
ou
X)
Gr
(RT
r
rth
p
m
or TransDigm Group 10.3%
No
ig
sC
sD
10
gie TDG $ 426.1
%
an
lo
no
.7
100% 0%
Tr
ch
12
Te Raytheon Technologie... 9.9%
Boe e on ) RTX
ing yth s (GD $ 61.0
Co Ra
.2% yna mic
(BA
)-8
0.2 H-Factor System 16 neral D
Ge
General Dynamics
GD
9.8%
% 8%
$ 143.9
16. ron Inc (TXT) Textron Inc 9.5%
Ticker or company/ETF name Equities Text
19.4%
TXT $ 31.7
rtin (LMT)
Lockheed Ma Lockheed Martin 9.2%
75% 25% 22.5% LMT $ 350.2
Your Current Company: L3Harris Technologie... 7.7%
LHX $ 164.7
Boeing Co (BA)
Howmet Aerospace Inc. 7.3%
80.2 L3
Ha
HWM
Boeing Co
$ 15.3
2.3%
35 rr BA $ 180.1
H
ow
.0% is Te
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38 m no
50% .0 et lo
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Sort by
% Ae
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nc Human Factor Score (ascending)
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In Total Stocks: 11
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Flying Off the Charts or Grounded in Reality?
Boeing stock is fraught with uncertainty. With so many questions about the company, investors
are letting their emotions guide their decision making. Since the aircraft crashes in October 2018
and March 2019 and the subsequent PR debacle, it seems a month hasn’t gone by without
Boeing (BA) making some discouraging headline news. Making matters worse for this stalwart
component of the Dow, the COVID-19 pandemic has hit the travel industry particularly ruthlessly.
Vague and ambiguous information concerning Boeing wasn’t in short supply previously and now
every new day seems to present a fuzzier picture of the company’s future:
In January 2020, production of the 737 MAX was suspended. Boeing had already reduced their
production rate to 42 aircraft per month. It is unclear what the outcome of this situation will be.
In mid-July, British Airways retired all of its Boeing 747s. Though approximately 500 remain in
service, only 30 are actively flying passengers. No one knows what this will do to future orders.
The 737 MAX remains grounded for passenger flights until early 2021 and perhaps longer following
an “emergency airworthiness directive,” issued by the FAA in late July. This order could result in
additional testing for aircraft currently in storage.
Some experts now put the chance of a Boeing bankruptcy as high as 45%, significant but far
from certain. Others, however, have trust in this historically stable, dependable company. Still
others lack faith in Boeing but believe in its investment potential in anticipation of some form of
government bailout. It can be hard, if not impossible, for investors to make an informed
investment decision with so much emotion and so much uncertainty surrounding a stock. The
first step? Focus on what we know and stop trying to forecast the unknown future.
What does the future hold for Boeing? We don’t know. Nobody knows and trying to forecast the
future just increases the odds of being wrong. However, we can get guidance from the H-Factor.
The H-Factor is a risk that comes from humans interpreting vague and ambiguous information in
a systematically incorrect way. This allows us to focus on what we do know for certain. Below is
the historical analysis showing the H-Factor historically,of Boeing relative to its stock price.3
H-Factor1 vs. Boeing Co (BA) Price
Boeing H-Factor and Stock Performance
100% 300%
90%
250%
80%
Boeing Stock Return
70% 200%
Boeing H-Factor
60%
150%
50%
100%
40%
30% 50%
20%
0%
10%
0% -50%
H-Factor Stock Return
Source: Yahoo Finance, New Age Alpha as of June 30, 2020.
As shown, Boeing has lost approximately half its value since early last year, while its H-Factor
increased from approximately 50% to over 80%—meaning investors are continuing to price
vague and ambiguous information into the company’s stock price. This is important because
the H-Factor speaks to the probability that the company will deliver the growth to support its
stock price. As Boeing’s historical growth has become less impressive relative to its stock
price, it has become less likely the company can deliver the growth the stock price implies.
Remember, investors think in terms of picking winners, when their goal should be to avoid the
losers. The H-Factor System methodically identifies, measures and avoid stocks that erode
returns. We believe Boeing has the chance to erode your portfolios returns.
Traditionally, investors recognized Boeing’s dominance in its field and trusted in its reputation.
This likely buoyed the stock throughout much of the turbulence it experienced recently. In
fact, as the stock price barely flinched from 2018 through 2019 despite its 737 MAX scandal,
some might say investors trusted it to a fault as the result of “status quo bias.” Sometimes
also referred to as, “bird in the hand bias,” this behavior occurs when people default to the
path of least resistance, ostensibly to avoid risk, and instead miss other opportunities. While
patience in investing is often regarded as a virtue, clinging to perceived safety can be perilous
in its own right. As it relates to the H-Factor, this is exactly why it’s critical to examine the
probability that a company’s growth will support its stock price.4 H-Factor1 vs. Boeing Co (BA) Price (cont.) Using New Age Alpha’s H-Factor System, we see that Boeing stands out among its domestic Aerospace & Defense peers with a great deal of H-Factor. Its H-Factor is 80.2%, higher than other companies in its industry. This H-Factor suggests there is less than a 20% probability the company will deliver the growth to support its stock price. This should come as no surprise. The company is being priced almost exclusively on information that is difficult to quantify (vague and ambiguous). This begs the question: should we be investing in Boeing at all? How to invest using the H-Factor2 It's about avoiding the losers not picking the winners. We argue that the solution is to look for a peer company for which there is more certainty around the company’s ability to deliver the growth to support its stock price. Consider General Dynamics (GD) instead. With an H-Factor of 17.7%, GD has a much lower and much more attractive H-Factor. So, to the investor in the aerospace industry, why not take your risk with a stock that gives you much better odds? Worried about the somewhat different business models of Boeing and GD? How about Airbus? Although not a U.S. company, Airbus is very similar to Boeing but has a much lower H-Factor of only 30.2%. Alternately, if the investor prefers a U.S. stock that competes in the Aerospace and Defense Sub-Sector, Northrop Grumman is a large, established defense contractor that has an H-Factor of only 10.3%. While, certainly, there’s a chance that a stalwart company like Boeing recovers and performs well, investment isn’t necessarily a zero-sum choice. Both Boeing and General Dynamics, for example, can be winners. After all, there is plenty of uncertainty that may actually resolve in Boeing’s favor. Then again, it may not. That is risk. We would prefer to avoid such risk. We believe you should wait to see an improving H-Factor, which would suggest improving fundamentals relative to Boeing’s stock price. At New Age Alpha, we don’t try to guess winners, we simply avoid the losers. We seek to do this by using the H-Factor to measure the amount of vague and ambiguous information that has been interpreted in a systematically incorrect way. We believe that Such stocks with a high H-Factor are unnecessarily risky and should be avoided. Remember, a good company at the wrong price will be a bad investment and a bad company at the right price will be a good investment.
5
s Inc. (HII)
Sub Industry
Huntington Ingalls Industrie
16.8
Aerospace & Defense
)
OC
(N
Huntington Ingalls I... 11.6%
rp
2.3%
Co
HII $ 167.5
an
m
Northrop Grumman Co 10.6%
G)
m
10.1%
2.3%
D
ru
NOC $ 301.1
(T
.1 op G
p
ou
X) TransDigm Group 10.3%
Gr
RT
r
%
rth
p( 12.7%
.7 Digm
Co
r TDG $ 426.1
No
ies
10
s
%
log
an
100% 0% no Raytheon Technologie... 9.9%
Tr
ch 16.2%
12
e RTX $ 61.0
nT
Boe eo D)
ing yth ics
(G
.2% ynam
Co Ra General Dynamics 9.8%
H-Factor System
16.8%
16 neral D
(BA GD
)-8 $ 143.9
0.2 Ge
% 8%
16. n Inc (TXT)
Textron Inc 9.5%
19.4%
Textr
o TXT $ 31.7
Ticker or company/ETF name Equities
19.4% rtin (LMT) Lockheed Martin 9.2%
Lockheed Ma 22.5%
LMT $ 350.2
75% 25% 22.5%
L3Harris Technologie... 7.7%
Your Current Company: 35.0%
LHX $ 164.7
Boeing Co (BA) Howmet Aerospace Inc. 7.3%
38.0%
HWM $ 15.3
80.2 L3
Ha
80.2
Boeing Co
BA
2.3%
$ 180.1
35 rri
H
ow
.0% sT
ec Sort by
38 m
hn
ol
50% .0 et og Human Factor Score (ascending)
% Ae
ro
ies
In
sp c(
ac LH Total Stocks: 11
e X)
In
c.
(H
W
M
)
Price Data: Provided by Bloomberg as of June 30, 2020
H-Factor Data: Provided by New Age Alpha as of June 30, 2020
The historical H-Factor Information cited above is being provided for illustrative purposes only and should not
be construed as providing investment advice or as a recommendation to buy or sell any particular security
March 12, 2020
CC NAA10015 SKU: 100016
Appendix
1
The H-Factor
The efficient market hypothesis holds that all information both the known (financial statements) and vague and
ambiguous information is priced into a company's stock. Humans may interpret vague or ambiguous information in a
systematically incorrect way causing mispricing. The H-Factor measures the amount of vague and ambiguous
information priced into a company’s stock. The H-Factor is a probability measured from 0% to 100% and the higher
the H-Factor the greater the chance of loss.
We look at risk very differently than many managers. Instead of worrying about volatility or beta, or any other risk
measure for that matter, we focus on asking one question and one question only. Can the company deliver the growth
implied by its stock price? The more vague and ambiguous information priced into a company's stock price the harder
it becomes for the company to deliver the growth implied by its stock price. We measure the company’s risk (the
H-Factor) relative to the company’s fundamentals only, we remove the vague and ambiguous information from our
determination. We believe the H-Factor is a risk that investors are unaware of, which erodes alpha, and they don’t get
compensated for taking. We want to avoid this risk.
2
How to invest using the H-Factor
The H- factor is not to be used in absolute terms but rather on a relative basis. An H-Factor of 80.2% for Boeing is high,
therefore we believe investing in a different Aerospace & Defense company with a lower H-Factor would be more
prudent. We would suggest investing in the company with the lowest H-Factor. If you were to invest in the sector, we
would suggest weighting your portfolio by H-Factor therefore attributing more of your portfolio to companies with a
lower H-Factor. We believe much of Boeing’s stock price is being priced based on analysis of vague and ambiguous
information making it difficult for the company to deliver the growth to support the stock price.
The above statements are not an endorsement of any company or a recommendation to buy, sell or hold any security.
Past performance is not a guarantee of future results. These statements and views are for informational purposes
only and do not represent actual portfolio results, but rather it is intended to show the application of the H-Factor to
an actual security. The views stated herein are only current through the date stated and are subject to change at any
time based on market or other conditions and New Age Alpha disclaims any responsibility to update such views. At the
time of this publication, New Age Alpha has a position in BA in one or more of its funds but it did not own have a
position in it for the entire period stated herein. New Age Alpha typically holds securities in its portfolio only if it
becomes part of the established universe of eligible securities that are part of each specific investment strategy (e.g.
the S&P 500®). It is important to note that there can be no guarantee that the application of the H-Factor to
investment portfolios or certain stock or securities can produce profitable results. For full disclosure, click here.7
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The above statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. Past performance is not a
guarantee of future results. These statements and views are for informational purposes only and do not represent actual portfolio results, but
rather it is intended to show the application of the H-Factor to an actual security. The views stated herein are only current through the date stated
and are subject to change at any time based on market or other conditions and New Age Alpha disclaims any responsibility to update such views.
At the time of this publication, New Age Alpha has a position in BA in one or more of its funds but did not have a position in it for the entire period
stated herein. At the time of this publication, New Age Alpha did not have a position in AirBus, Northrop Grumman or General Dynamics. New Age
Alpha typically holds securities in its portfolio only if it becomes part of the established universe of eligible securities that are part of each specific
investment strategy (e.g. the S&P 500®). It is important to note that there can be no guarantee that the application of the H-Factor to investment
portfolios or certain stock or securities can produce profitable results. For full disclosure, click here.
Citations
Citation 1
https://www.wsj.com/articles/boeing-737-max-increasingly-unlikely-to-carry-passengers-before-2021-11595372485
Citation 2
https://www.macroaxis.com/invest/ratio/BA--Probability-Of-Bankruptcy#:~:text=Based%20on%20the%20latest%20financi
al,than%20that%20of%20the%20firm.Contact Us
United States:
New Age Alpha LLC
555 Theodore Fremd Avenue, Suite A101
Rye, New York 10580
P 212.922.2699
F 212.922.2698
South Africa:
New Age Alpha Advisors, LLC
208 Barry Hertzog Ave.
Greenside, Johannesburg 2196
P +27.11.486.2500
F +27.11.486.2915
August 2020
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