Matthew Waterman, Investment Writer, New Age Alpha Jun 30, 2020 7:30:00 AM 11 min read Stock Insights

Boeing Co (BA) Flying Off the Charts or Grounded in Reality?

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.

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 of Boeing relative to its stock price.

H-Factor1 vs. Boeing Co (BA) Price

 

NAA_Boeing_1-01

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.

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.

 

NAA_Boeing_2-01

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

Appendix

1The 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.

2How 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.

Try the H-Factor System for Free

210112_NAA_blog_HFS banner-01 (1)

Analyze your investments and empower yourself to ask the right questions. How much of your portfolio is subject to the H-Factor? With H-Factor scores for over 5000 stocks globally, use the H-Factor System to analyze, construct and audit portfolios that avoid the H-Factor.

Try the H-Factor System

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.

August 2020

Transform your portfolio in under 10 minutes

Traditional risk metrics are outdated. In under 10 minutes a New Age Alpha Specialist will help you identify a hidden risk in your portfolio that erodes performance and show you how to avoid it for a dramatically differentiated source of return.