The Boeing Story - Implications to the Dow
With Boeing’s 737 Max issues and subsequent price drop, I have been asked if I believe the stock is worth consideration for bargain hunters. I thought I’d share my perspective because not only does the Boeing story impact the stock price, but it also is a big component of the Dow Jones Industrial Average which means it can influence Dow or “the market” as most know it.
The Boeing story is a big one and I believe more details will be unfolding over the weeks and months ahead. I am not writing about whether I recommend you purchase Boeing. Instead, I want to take this opportunity to look at the situation like a business owner, which is why you buy a stock in my opinion. Does it make sense to buy into a business when delivery of their core product is halted due to a potentially major (and potentially costly) problem? I’ll let you make that decision. By all appearances, such decision may be more of a bet rather than an obviously sensible one.
An Important Dow Jones Component
Boeing has been a component of the Dow Jones Industrial Average since 1987. The Dow, as you may know, holds 30 companies, which have been changed over the years. Nonetheless, Boeing has been one of the best performing stocks in the Dow Jones Industrial Average (DJIA) for quite some time. Shares have tripled since the presidential election in 2016, making it the highest-priced stock in the Dow.
737 Max Under Suspicion
The fallout from the two 737 Max crashes has been tragic, both from a human perspective as well as from a shareholder perspective. The stock (BA) is down more than -10% from its peak as of this writing. Concerns about the safety of the 737 Max (less than two years after entering commercial service) are to be expected after two deadly accidents in quick succession. Of course, aviation officials caution against prematurely drawing conclusions, and some large Max operators continue to vouch for the jet’s safety. But the Maneuvering Characteristics Augmentation System, or MCAS, is reportedly triggering an erroneous sensor reading. Preliminary reports indicate the Lion Air plane was pushed downward dozens of times before it crashed. And like the Ethiopian Airlines crash, the errant sensor signaled the plane was stalling shortly after takeoff.
There appears to be a lot of questions but not a lot of answers or details as of yet. What we do know is Boeing’s 737 class has been a workhorse for airlines worldwide and the 737 Max has been the company’s best-selling plane ever. With 370 delivered and roughly 5,000 more on order means this is a big story for Boeing. Currently all 737 Max planes in operation are grounded. With an extensive international customer base, Boeing faces scrutiny from multiple parties with the accident investigation. It should be noted that it is not clear if these two tragedies are linked or even if something is faulty with the 737 Max.
But if there is a faulty system, it could be an extremely serious challenge for the company. Those interested in the stock should keep a close eye on the crash investigation and the results from it, which could take some time to become public. There’s a lot of detail that we do not know yet.
Price Weighted Implications on the Market
Which brings me another point. The Dow is a price-weighted index, which means the stock with the highest share price (in this case, Boeing) influences the index the most. Boeing isn’t the biggest company in the Dow but it does have the most influence because of its price. Apple is much larger, but since Apple’s stock price is about half that of Boeing’s, it’s only about half as influential. This means Boeing stock fluctuations disproportionately affects the Dow Jones Industrial Average. It may wise to keep this in mind as the story unfolds. Boeing’s stock price may bounce around with developments and any volatility is likely to have an influence price of the Dow.
Before you focus on one stock however, I recommend that you have a diversified portfolio to meet your long-term financial goals. With the robust market growth, it’s easy to lose sight of your purpose for investing and, instead, focus on getting in on the next action. However, this approach to investment and, specifically, a lack of diversification can be a costly mistake when things turn sour. In thirty years, I have seen many investors make this mistake.
Now may be a good time to review your diversification and asset allocation strategy.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Asset allocation does not ensure a profit or protect against a loss.