Waiting for a Boeing Co (BA) Stock Pullback Is the Best Play

Bret Kenwell

Updated Thu, Oct 12, 2017, 5:12 AM

What will it take to knock Boeing Co (NYSE:BA) out of the sky? Between late-2013 and late-2016, BA stock didn’t show buy-and-hold investors a gain (excluding the dividend). But over the past year, Boeing stock has taken off, flying higher by more than 90%. In fact, it hit new highs just this week.

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I’m not sure what finally woke investors up. Boeing hasn’t changed that much over the last five years, with the exception of its growing production and ever-increasing backlog of orders. One thing that took a huge toll on BA stock that many may not have noticed? Confidence.

Not confidence in Boeing stock price necessarily, but confidence in the economy. Over the last few years, both global and domestic economies have found their footing. Despite being 10 years removed from the financial crisis, many are still psychologically scarred from the recession. Now though, many investors, consumers, owners and managers are coming around to the idea that better days are here and are here to stay.

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Even though BA stock was cheap, paid a huge dividend, had record results and an enormous backlog, the stock still struggled for years. It’s sort of like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F). They had record results, low valuations and paid fat dividends. No one wanted them. What if the economy falls apart? Any day now there needs to be an economic correction, possibly a recession! That was the rhetoric for years.

But now we see GM, Ford, Boeing, Caterpillar Inc. (NYSE:CAT), Cummins Inc. (NYSE:CMI), Cintas Corporation (NASDAQ:CTAS) all hitting or approaching annual and all-time highs. These are serious cyclical stocks and show how much confidence is radiating in the market right now. The economy is better. Investors know. Consumers know it. And now they really believe in it. The International Monetary Fund also increased its global economic outlook for 2017 and 2018.

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A Closer Look at BA Stock

On the sales front, Boeing is none too impressive. Analysts expect a 2.7% contraction this year and just a 1.7% gain next year. 2018 revenues should come in below that of 2016’s results. However, earnings growth should be strong. Thanks to Q2 2016, where BA incurred a large one-time charge, its 38% earnings growth for 2017 appears lopsided. In any regard, analysts expect solid growth over the next several years, with $15 in EPS for 2020, that is 50% higher than its 2017 expectations.

BA stock now pays a 2.2% dividend yield and that’s after a 90% rally. That’s its lowest since early 2015, but it’s one of the many reasons investors like Boeing. Before that, 3.5% to 4% yields were common, while a mid-teens earnings multiple made BA stock relatively cheap.

A low valuation, high yield? Sounds like Ford and GM. But unlike Ford and GM, the consumer was not the end buyer. Meaning, a turn in the economy would not instantly sap sales, earnings and margins.

In Boeing’s case, it has thousands of planes in its backlog. Its backlog was valued at $424 billion last quarter, so investors know there’s years of earnings and cash flow that are almost guaranteed. Pair that with the valuation and dividend and BA stock was a no brainer. For years, concerns that the economy would reverse and buyers like Delta Air Lines, Inc. (NYSE:DAL), FedEx Corporation (NYSE:FDX) and Southwest Airlines Co (NYSE:LUV) would yank their orders away from BA. That didn’t happen, and it would take quite the traumatic turn to cause it.

With that, can anything derail BA stock?

What About BA Stock Now?

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I’m not sure that it can. It’s hard to argue about valuation, as it’s rarely a driver for a big correction. For now, nothing foreseen can trip Boeing stock. With that said, up 90%, I find it incredibly hard to be a buyer up here.

After breaking out of a near two-year consolidation, BA stock is flying. The blue oval indicates an overbought situation. It can still go higher, but I think we are a bit extended. Historically, BA tends to pullback and/or consolidate in order to work off overbought conditions.

A logical pullback area would be to $245, a near 6% pullback. But with a stock this strong, that’s no guarantee. I like Boeing, but sometimes we just have to say we missed the boat. Wait for a pullback, and if we’re lucky, we can have Boeing in a broad market correction. Otherwise, we have to chalk this one up as a miss.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.