In this past weekend’s Barron’s, The Striking Price author Steve Sears, highlighted Goldman Sachs’ fundamental and derivative research on Boeing (BA) in front of the company’s annual analyst day this Wednesday (Goldman Gloomy on Boeing Outlook). If you can’t tell from Sears’ title, Goldman isn’t exactly positive on the stock. In fact, their research analyst is one of the two Sell ratings on the stock and has a $101 12 month price target, down 24% from current levels, and what would be 36% from the stock’s all time highs made in early 2015.
Goldman’s derivative strategists suggest short dated options prices for hedging into the event are cheap. They point to the relatively cheapness of BA options at the moment while the stock has a history of selling off following its analyst days, per Goldman:
“We have 14 analyst days on record for BA since 2002 (one a year), and 10 of the 14 events were negative catalysts for shares, supporting our view that given the recent outperformance in shares, low price of options, and risks to estimates, investors should hedge risk around the event with puts,”
I don’t have a strong opinion on in BA one way or the other. But Goldman’s tactical short/ protection call is interesting. This comes a week after the company issued Q1 results and Q2 guidance that investors seemed okay with initially as they sent the stock up 2.9% in the session following results. The stock has since given back all of those gains and seems to have found some technical equilibrium between its 50 and 200 day moving averages:
BA is certainly a tricky stock at the moment. The company is in the midst of a $12 billion share buyback, pays a dividend with a current yield of 3.4%, nearly double that of 10 year treasury bonds, trading below a market multiple (despite expected eps growth of 10% in 2016) at 15.6x expected current year, very near a 5 year low:
I suspect one of the big issues for BA holders is the expected sales decline in 2016, its first since 2010. Additionally, investors seem worried about just how manufactured their eps growth will be in a year of declining sales, and what will be the effect (despite the recent weakness) of the U.S. dollar on their 60% revenue exposure outside the U.S., where Asia (including China) made up 27% of their sales in 2015.
As Sears noted in his column, 30 day at the money implied volatility (the price of options – blue line below) are trading just about 21%, just off 2016 lows, while 30 day realized volatility (how much the stock has been moving – white line below) is at 2016 lows. Investors don’t expect fireworks for Wednesday’s event:
GS’s derivative strategists suggest buying weekly near the money puts as a hedge against stock, for a little less than 2% of the stock price. That makes sense with 10 out of 14 down moves following analyst day. But I would also say that whatever premium a holder would spend to protect the event for such a short term can also be used to buy some time, by using a farther month out put spreads. I say this because if I were a long holder, it would be this technical set up that would bother me most, not just the analyst day.
The 8 year chart below shows the very healthy raise since its financial crisis lows in 2009, and how the stock has held the uptrend, with February’s most recent test:
What’s troubling is the relative strength to the S&P 500 (SPX), down 16% vs 4% from their all time highs in 2015, but specifically the two lower highs and lower lows. A failure in and around current levels could put another test of the uptrend in place, just above $100.
So augmenting the Goldman commentary, this is what I’d look to do if I was a shareholder worried beyond the analyst day. With the stock closing Friday at $133, the May 13th weekly 133 puts are about $2.20. If you bought those you would have protection below $130.80. If you instead took that money and wanted more time you could sacrifice the near money-ness of the protection. For instance, looking to July expiration, you could pay $2 for the 125/110 put spread. This spread has a lower level of protection with a break-even at $123 but offers potentially $13 of protection down to $110 over a greater than two month period.