I’m not an aviation expert. But I do know this:
“If you wouldn’t fly on a Max 8 right now, you shouldn’t even consider buying the stock.”
That was my Tuesday morning warning for viewers of Fox Business News’ FBN:am show.
In the past six months, there have been two Boeing 737 Max 8 crashes.
In October an Indonesian Lion Air 737 Max 8 crashed shortly after takeoff, killing all 189 people on board.
On Sunday an Ethiopian Airlines 737 Max 8 went down minutes into a flight to Nairobi, Kenya, resulting in the deaths of all 157 passengers.
With 17,000 U.S. flights last year and no crashes, the fear of flying on a Boeing Max 8 is probably irrational.
But investors and humans aren’t rational beings. And that’s why you should avoid Boeing’s stock for now.
What Caused the Crash
The Federal Aviation Administration said: “External reports are drawing similarities between the two accidents. However … we have not been provided data to draw any conclusions or take any actions.”
The mechanical issue is this: The Max 8 has larger engines than previous 737s, and they are in a slightly different, more forward position. As a result, the plane has a tendency to pitch its nose up.
To compensate for this issue, Boeing uses a sensor to automatically push the nose down if it gets too high when pilots are manually flying the jet.
In the Lion Air crash, investigators blamed a faulty sensor. And it appears that a similar problem led to Sunday’s disaster.
Both crashes occurred right after takeoff with nearly new aircraft, during good flying conditions.
Countries around the world have grounded their Max 8s until the black boxes can be analyzed to determine what caused the crash.
Boeing’s Big Bet on the 737 Max 8
There are around 350 Boeing 737 Max 8s in service, with a backlog for another 3,000 planes.
The program contributes about one-third of Boeing’s bottom line.
This is also a significant program for domestic airlines, which have grounded their planes and now wait with bated breath to see the results of the investigation.
It could be a software issue and an easy fix. That still might not be enough to reassure travelers that the planes are safe.
Before the crash, Boeing Co. (NYSE: BA) had rallied 49% from its December lows. That’s enough to handily beat the S&P 500 Index’s 20% gain during the same time frame.
On Monday, BA dropped 15% on the open to $373, filling in a gap up from early February. It then bounced off these levels and finished the day down 5%.
My biggest concern is that BA’s short percent of float is at 0.86%, with only 1.4 days to cover.
As a comparison, Tesla Inc.’s (Nasdaq: TSLA) short percent of float is 21.44%, with 3.4 days to cover.
Overstock.com Inc.’s (Nasdaq: OSTK) short percent of float is a whopping 74.01%, with 4.4 days to cover.
Stocks with high short interest have natural buyers on a sharp fall as shorts cover. That’s not the case with Boeing.
The options markets are still looking for a considerable move in the near future, with next week’s at-the-money straddle priced for a 5% move.
So Boeing’s can potentially fall even further. Avoid its stock for now.
If you already own shares, consider selling at-the-money covered calls against your position. This will help you capitalize on Boeing’s option volatility and protect your downside.
Regards,
Ian King
Editor, Crypto Profit Trader