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Boeing: A Risky But Potentially Lucrative Contrarian Play

by | Mar 28, 2019

No matter where you turn, you can’t avoid hearing about Boeing Co (NYSE:BA) and its twin disasters: Lion Air Flight 610, and more recently, Ethiopian Airlines Flight 302.

It’s not difficult to understand why our media has such a macabre fascination with airline crashes. Although we’re told time and again that statistically, air travel is much safer than driving, one crucial element is missing in this assessment: when we’re flying, we have zero control over the final outcome.

I’ve traveled several times to multiple destinations across the world, and I’ll admit to you this: I never take my gravity-defying excursions for granted. Every shake, every shudder that the plane incurs sends me a very clear message. I’m only seconds from death if even a small, but crucial component fails.

Recognizing this guttural reality, we can reasonably assume that a media firestorm will surround Boeing. The spotlight was already on the company when the doomed Lion Air flight crashed; now, we have a consistent pattern that points even more alarmingly to mismanagement and fatal negligence.

Logically, we can also deduce that Wall Street will substantially penalize Boeing shares. Several investors have already abandoned their positions, but this is likely just the beginning salvo. I’ll be very shocked if BA maintains its current valuation for long.

Still, contrarian investors might view Boeing’s prosecution as an opportunity. As the old adage states, buy low and sell high. Here’s what to look for in deciphering this potentially-lucrative idea.

What Caused Lion Air and Ethiopian Airlines to Crash?

Before we can determine the viability of Boeing shares as a contrarian investment, we must understand what happened. Currently, transportation experts and government agencies are investigating the two fatal accidents. Therefore, any firm conclusion at this point is speculative.

Nevertheless, solid evidence exists that imply a critical failure in Boeing’s Maneuvering Characteristics Augmentation System, or MCAS. Integrated in the company’s brand-new 737 Max 8 airliner that was at the epicenter of both crashes, Boeing engineers originally designed MCAS to prevent the aircraft from stalling.

Now, the term “stalling” is different when applied between automotive and aeronautical scenarios. In the former, it references the engine cutting out. But in the latter, the airplane loses lift, and is in danger of careening back down to earth.

The most effective way to correct this problem is to gain airspeed; thus, in a stall, pilots will nose down, trading altitude for velocity in an attempt to regain control. But what happens if an automatic-stall sensor falsely believed that the airplane lost lift?

Apparently, that was a very real circumstance for Flight 610 and Flight 302. According to flight-data records, the pilots in the first crash struggled mightily with MCAS, which kept pitching their 737 Max’s nose downwards.

In the aftermath of the tragedy, Boeing blamed Lion Air’s ground crew for improperly handling MCAS-related sensors on the doomed airliner. Of course, Lion Air’s management team were outraged, quickly cancelling an open order for more Boeing 737 Max 8s.

During that timeframe, the accusations and counterarguments sounded like a high-level game of “he said, she said.” Both sides presented valid points, although a cloud of uncertainty hung over Boeing and BA shares.

Boeing Shares will Feel the Pain

While Boeing’s executive leadership team crafted bullet-points that pinned the blame on Lion Air’s negligence, airline pilots decisively sided with Lion Air’s version of the story. Several of them, most notably from domestic airliners, claimed that Boeing never properly communicated how to handle MCAS under pressure.

In this case, well-trained American flight crews essentially switched off the MCAS system by flipping to manual controls. Boeing asserted that Lion Air’s pilots should have done the same instead of fighting with the automated controls. Sadly, a miscommunication may have prevented them from understanding what to do in this pressurized situation.

But that’s no excuse for Boeing to knowingly introduce a defective and dangerous aircraft to the flying public. According to a damning report from Ars Technica, the company self-certified many of their safety metrics. That’s a major no-no for painfully obvious reasons.

More damning is that government investigators see alarming similarities between the two accidents. Adding salt to festering wounds, the evidence is such that it doesn’t take a transportation expert to recognize the patterns.

From The New York Times, vertical speed records indicate that Lion Air Flight 610 registered multiple, sharp movements five minutes after takeoff. That’s incredibly unusual — and completely irrational — because you only want to travel in one direction at this point: up.

And Ethiopian Airlines Flight 302? We see the same jerky movements that’s not normally associated with take-off procedures. The difference here is that Flight 302 turned volatile within seconds after the plane lifted off.

Invariably, Boeing faces multiple lawsuits, which will take years to resolve. It may take at least that much time for the public to get rid of this foul aftertaste.

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The Risky, but Enticing Investment

I love buying great stocks at discounted prices. The best method for actualizing this setup is to buy fundamentally sound companies that find themselves in rough waters. But Boeing shares? That seems almost suicidal for your portfolio.

Part of being a contrarian is recognizing opportunity form insanity. Right now, buying BA shares probably falls under the latter category. The Street has only really begun to digest the terrible news. Undoubtedly, more painful exposes will come, pressuring the already-embattled company.

And frankly, if you’re a conservative investor, you may want to sit this one out. If subsequent investigations and court proceedings find that Boeing released the 737 Max 8 fully aware of its dangers, you’re talking a paradigm-shattering wave of bearishness.

But if you can stomach the risks, and can employ a longer-term view, I like Boeing shares for two critical reasons. First, Boeing is a dominant player in the airliner business. Its only real rival is Airbus SE (OTCMKTS:EADSY).

Of course, Airbus represents substantial competition, and unsurprisingly, its share price has ticked higher since the Ethiopian Airlines crash. But is that enough reason for BA customers to jump ship? Not really.

Airplane manufacturers operate on long lead times. For an airliner to suddenly switch manufacturers would require them to go to the back of a very long line. It’s not uncommon for backorders to extend five or six years. In other words, as much as Airbus would like to steal demand, they simply don’t have the capacity.

The second bullish factor is Boeing’s business diversity. Levered to both civilian and military applications, the company is virtually guaranteed viable revenue channels. With geopolitics anything but stable, I wouldn’t count out BA shares.

Don’t Jump to Conclusions

With available evidence, it’s difficult not to fault Boeing. After all, we’ve seen these types of incidents before. Big corporations have made cold calculations in the past, reasoning that litigation expenses are cheaper than wholesale product recalls.

And if I’m going with my gut, it tells me that Boeing is guilty as charged. Technically, Boeing shares are hanging on by a thread. If investigators or legal authorities make an official pronouncement of guilt, the stock is toast.

However, I’ve been around the block a few times to recognize that not everything is so clear-cut. Boeing could make a plausible, even strong defense. If I was on the defense team, I’d immediately point to airliner safety standards: why did other airliners fly and manage the 737 Max 8 safely, while Lion Air and Ethiopian Airlines failed?

It’s not politically correct, but it’s a fair question to ask. Thanks to its fuel-efficiency and seating capacity, the Boeing 737 Max 8 represents the company’s best-selling airplane. A broad sample size exists for investigators to assess. Is it not unreasonable, then, to imply that poor safety standards and training doomed these flights?

As I mentioned near the top, I’ve flown all across the world. But once I’m in a particular country, I don’t typically fly their local airliners. Without attempting to sound snobby, I realize that our American pilots receive far superior training to almost everyone else. Thus, I wouldn’t feel safe subjecting myself to unknown, foreign standards.
And really, I don’t know anything about the standards at Lion Air, which is headquartered in Indonesia, or the namesake Ethiopian Airlines. I can guess, though, that their standards aren’t as good as ours. That alone means we shouldn’t jump to conclusions.

Ace Bauer
Chief Editor, SmartMoneyResults.com

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