You do diligent homework, from fundamental, market-share positioning, valuation, to technical analysis to recommend a stock. But the stock then goes down ~40%. What do you do?

Unlike many fund managers such as Cathy Wood who continues to refuse to acknowledge her mistakes as her stocks are down >50% and therefore her funds, here at WIC we are transparent. We are newcomers to this market, we’re learners, hence we’re never afraid to admit our mistakes. We understand your capital is costly, your time is valuable, and we would never want you to invest in a stock we no longer believe in. 

This takes us to Boeing and our decision last month to take a ~40% loss in this name and run away. Just earlier in the year, we published a conviction buy note in Boeing (https://www.wicphilly.com/archive/jan-2022-news/18-jan-boeing-thesis). We laid out our investment thesis, analyzed the fundamentals, the valuation and the technicals. We told investors to buy. So why did we sell in May? What did we get wrong?

1. Thesis 1: Strong demand for new airplanes. 

Our thesis number 1 when initiated Boeing was the view that airlines need new airplanes, and Boeing being one of only two major aircraft manufacturers in the world, would benefit from such strong demand. The demand has been there, so our view was partially correct, but the management’s execution is so poor that the company cannot meet demands. There are two major players here, the long-haul B787 and the short-haul B737Max. The 787 program has been halted by the Federal Aviation Administration since early 2021. Management had promised by the middle of 2021 the issue would be resolved, Boeing would be able to resume delivery of new 787 aircrafts. However, we're in the second half of 2022, and the issue still has not been resolved. Second is the long-standing problem of the B737Max in China - still has not returned to service yet.

2. Thesis 2: Return of 737Max. 

Our thesis number 2 was the return of the 737Max in China, bringing huge cash flows to the company. But as addressed previously, management has been so poor that they still cannot get the 737Max back to service in China. A strong management team would have done whatever it takes to work with the Chinese authorities to get this issue resolved. But no.

3. Uncontrollable factors: 

To be fair, there are factors that are outside of management's control, and outside of our ability to forecast. One includes continued shut down in China, leading to local airlines not needing new airplanes at the moment. Another factor includes the ongoing Russia-Ukraine war, forcing Boeing to shut down a key factory there. Also, supply-chain disruptions lead to higher material costs. The tragic crash of a China Eastern Airlines 737 earlier in the year also did not help with the narrative. 

4. Technical Analysis: 

We used technical analysis to recommend the buy, but we turned a blind eye when the stock failed a key level. Why use technical analysis if you don’t respect it? 

Bottom line, when an investment is down, you have a loss no matter if you take the loss or not. What matters is how are you going to make back what you loss? Do you want to continue to hold that loss, a loss that has come from basically poor company’s execution and performance, and hope that it will go up magically somehow? Or do you want to take the loss, move on, go make a bet where you know the odds are on your side, because the other company’s execution and performance is stellar? We believe the second choice is wiser. Since we got off the Boeing plane, we deployed the cash into Advanced Micro Devices (AMD) which beat on earnings and surprised analysts with twenty-percentage growth compared to mid-teen. We deployed the cash into Google (GOOGL), which is trading at a very reasonable price-to-earnings multiple while growing revenue north of 23%. We shifted our faith to Disney (DIS), which is another iconic American franchise that is clearly benefiting from the world's recovery from Covid, yet market is not yet rewarding it. Now, did we make the right decision to part way with Boeing? Probably not, and probably the stock will go higher now that we've sold it. However, we had to make the decision because we cannot justify owning the pain anymore. If Boeing moves up, likely other names will move up too, and we would be fine. But if Boeing continues to go down, we would be kicking ourselves if we didn't sell out of this name.