MorningWord 10/24/13: $BA Flying High

by Dan October 24, 2013 9:24 am • Commentary

MorningWord 10/24/13:  Today is like the Super Bowl of Q3 earnings with over 350 companies reporting. Maybe as expected, due to fairly muted expectations for Q3, and the expected Govt Shutdown “mulligan” for Q4, the broad market has hung in there with the SPX less than 1% made from the all time highs.   One take-away that has been obvious thus far in earnings season is that investors are sticking with what has worked and quickly exiting laggards that continue to disappoint.

Case in point, BA.  The stock was at an all time high (up 65% ytd) heading into yesterday morning’s results, which blew the doors off despite potential headwinds for the debacle in Washington.  The stock gapped to uncharted territory and never let up on a day that was marked by weakness in equities the world over.  The one year chart below shows the near parabolic move off of the uptrend that has been in place since early this year, resulting in 27% gains since the end of August.

BA 1yr chart from Bloomberg
BA 1yr chart from Bloomberg

One thing I am fairly certain of though, this is not normal price action, and will not likely be the norm going forward.  If a stock like BA continues to rise at the rate in which has of late without a meaningful uptick in earnings, then the stock will become seriously vulnerable to a nasty correction, at least back to the uptrend line around $110 or possibly to the $100 support level from the summer.

Since the Dreamliner issues have been swept under the rug (possibly only for the time being) the bull story has been that BA has a 20 year backlog for the planes worth hundreds of billions of dollars, oh and the stock is really cheap.  Well the stock was really cheap when it was trading at a market multiple 30% lower just 2 months ago, but now with earnings only expected to grow 10% a year for the next 2 years, the stock trading at nearly 20x trailing is not nearly as attractive.  It is my view that the stock is un-investable at these levels.  If you own it, mazel tov, raise your stop, enjoy yhe 1.5% div yield, take solace in the fact that the company is buying back a lot of stock, but also remember that stocks take the stairs up and the elevator down.