Uncategorized, Weekly Update

The Dow Industrial’s Badass Stock

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Published January 19, 2018


The stock market’s near non-stop rise over the past two years has been led by the FAANG stocks – Facebook, Apple, Amazon, Netflix, Google (Alphabet). This handful of tech/consumer heavyweights accounts for well over a third of the market-leading Nasdaq 100 (QQQ). They have risen between +50% and +140% since the beginning of 2016, the start date of the current rally. While the rapid ascent and overwhelming near-monopoly power of these transforming companies is well-known by all stock investors, there is another very big company that eclipsed them all … and by a wide margin.

The Dow Jones Industrial Average comprises 30 companies that purport to represent the U.S. economy. It is by far the oldest index in the stock market and the one most frequently referred to in popular media. While these 30 companies may be a good proxy for the U.S. economy, the list typically lags today’s tech/consumer-driven landscape. For example, Apple is the only one of the above companies in the index.

On the other side, focusing on the FAANG stocks misses quite a lot of what’s been going on recently. After years of figuring out things post-financial crisis, the global economy is clicking now. This global growth is best reflected in the newfound strength of industrial companies like Boeing. And also in the best performing stock of the Dow Jones Industrial Average.

Just four years ago, this company appeared to be on the ropes, plagued by a years-long product gaffe that soured investors. This article from January 2013 highlights the long list of woes:

What Went Wrong At Boeing?

Four years later Boeing is the belle of the ball. Take a look at this stock price (the orange line soaring almost off the chart below):

Chart 1: Boeing stock takes flight

Boeing stock takes flight

This zooming stock price, well outperforming the hotshot FAANG stocks over the past two years, shows what happens when a company goes from disappointing to superstar status. Earnings and cash flow grow, dividends are ramped up, stock bought back, and investor enthusiasm grows. Strong growth in earnings multiplied by growth in investor enthusiasm (shown as a rising P/E ratio) sends a stock price powerfully upward.

As investor enthusiasm grows, expectations also rise. This leaves the stock on thin ice if there is a disappointment. Boeing has over seven years of order backlog and is squeezing out more profit and cash flow per plane built. The company appears poised for a wonderful few years ahead. What can go wrong? Having a stock that is priced for perfection. While most analysts are raising their price targets on Boeing to around $400 with the additional benefit of the tax reform, this article expresses the challenges of having a hotshot stock – the hottest big company stock in the market:

Boeing is the market’s darling

Market Update

Stock investors came back from Monday’s holiday looking to continue the extraordinary start to 2018. The initial thrust in the market ran into trouble though with stocks reversing lower in their first really ugly day of the year. Investor concern over the potential for a U.S. government shutdown seemed to be the root of the dour sentiment. The negative reversal was not damaging, however, with indexes off only -0.4%. Tuesday’s sour attitude looked like a bear trap as Wednesday’s trade was unabashedly positive all day. Stock indexes quickly erased Tuesday’s loss and marched higher by +1.0%. Among the winners were the closely-watched semiconductor group which surged upward after chip equipment maker ASML’s strong report. More broadly, Apple (AAPL) announced an intent to repatriate billions of dollars in cash held overseas and invest that cash in the U.S., linking the move to the recently passed tax reform package. Stocks held flat Thursday while interest rates ticked higher. The 10-year U.S. Treasury yield rose past 2.6%. And headed to 2.65% Friday with stock investors cheered by progress toward an agreement to avoid a government shutdown. On the earnings front, good news from Nike (NKE) offset disappointing results from IBM to limit the Dow’s participation in Friday’s advance.

Stocks added another week of gains with the S&P 500 (SPY) rising +0.89% to close above 2800 for the first week ever. The Nasdaq 100 (QQQ) posted a +1.12% gain. Small-cap stocks (IWM) notched a weaker +0.29% rise.

Warm wishes and until next week.