Fundamentals may drive stock prices in the long term, but market sentiment is ultimately what catalyzes price changes. If institutional investors believe a story about a company, then it almost doesn’t matter what the underlying financials of that business are. Nothing will change until the big players stop believing the story.
Ever since the Ethiopian Airlines 737-Max crash finally made regulators sit up and realize there were serious problems with Boeing’s (BA, Financial) new workhorse airplane, investors have had one burning question - why is the stock still so high? Despite numerous stories detailing corner-cutting in the development and certification of the Max, Wall Street has seemed unfazed and content to believe the company’s assurances that the aircraft would return to the skies soon. In other words, they believed a story. Now, it seems like this story may be changing.
MCAS problems
As of the morning of Oct. 21, Boeing stock is down almost 11% from where it opened on Oct. 18. On Friday, it was reported that senior Boeing test pilots for the Max discussed serious handling issues with the maneuvering characteristics augmentation system- the handling control software that has been determined to have caused both crashes - in Boeing’s flight simulator, which were subsequently not disclosed to the Federal Aviation Administration. Boeing responded to the story, countering that the FAA was aware of the presence of MCAS during the certification process.
As noted above, there have been many similar stories of possible malfeasance in the past six months that haven’t had nearly the same effect on Boeing’s stock. What may be different this time around is the institutional response. Since the story came out, a number of analysts at major investment banks have downgraded the company. UBS (UBS, Financial) moved Boeing down to "neutral" from "buy" (moving its price target from $470 to $375), stating:
“[This] reinforces the perception of and heightens the potential of incomplete disclosure, which inherently puts more money/trust & time at stake.”
Note the language - UBS is cognizant of the "perception" of wrongdoing, highlighting the importance of narrative creation for stock pricing. In a similar vein, Credit Suisse (CS, Financial) also cut Boeing from "buy" to "neutral" ($416 to $323), saying:
“We can no longer defend the shares in light of the latest discoveries which significantly increase the risk profile for investors.”
My point is not that these analyst notes represent completely accurate appraisals of Boeing’s future prospects. You should always do your own research and refrain from blindly following the crowd. My point is these downgrades could be harbingers of a fundamental shift in sentiment on Boeing among the institutions that really matter. Typically, analysts will want to get ahead of this shift and gradually change their price targets so that they can say "I told you so" if the stock goes south. The catalyst that Boeing bears have been waiting for may have arrived.
Disclosure: The author owns no stocks mentioned.
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