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Market Research - March 14, 2019

Will Boeing Stock Fly Again? Lessons From Crises Past

Share prices of Boeing Co (BA) are down sharply after the tragedy on March 10, 2019, in which an Ethiopian Airlines flight operating a Boeing 737 Max 8 crashed and killed all 157 people on board.

This incident, combined with Lion Air’s October 2018 crash involving the same model plane, has caused regulators across the world to ground the plane indefinitely. On Wednesday, the Federal Aviation Administration (FAA) of the United States joined that list of regulators and sent Boeing’s stock even lower.

The chart below shows shares of Boeing closed at $422.54 on Friday, March 8th, and are currently trading around $374, more than a 15% drop in less than 4 trading sessions. Albeit, Boeing greatly benefited from the broader market rebound to start 2019, and is still above its 52-week average.

As of right now, Boeing planes are only suspected to be a contributing factor to the crashes. Even so, now is not the time for regulators to gamble — even if the share price dip prompts investors to do exactly that.

Those investors who own Boeing stock may ask if it’s time to sell. Those who see a buying opportunity want to know when Boeing will bottom out. Naturally, timing the market is always a gamble, but what can investors (read: gamblers) glean from history?

After all, we’ve seen this before. There’s a mile-long, and ever-growing, list of public companies involved in consumer safety — related crises, causing the public to lose trust in their products and often leading to recalls or regulatory action.

As a caveat, we acknowledge up-front that there are numerous other factors (earnings announcements, industry landscape, broader market movements, etc.) that might have impacted the below companies’ performance beyond or in addition to the situations outlined. Nonetheless, let’s see what we might learn.

In 1982, Johnson & Johnson (JNJ) recalled shipments of Tylenol Extra-Strength after seven people died in the Chicago area. The pain reliever, J&J’s best-selling product, had been tampered with poisonous potassium cyanide. Tylenol was praised for swiftly warning the public and preventing further deaths.

The chart below shows Johnson & Johnson’s stock price dropping 17.46% in just 6 days. It took 34 trading days for JNJ to re-attain its pre-crisis share price. If you had bought the bottom, your one year total return would be 23.3%, while the S&P 500 gained 37.5% in that time.

Five years after the Merck & Co. (MRK) anti-inflammatory Vioxx received FDA approval, it was permanently taken off the shelves in September 2004 on reports that it raised the risk of heart attacks. By the time Merck took action, an estimated 20 million Americans had taken the drug, 88,000 of whom had heart attacks, and 38,000 of whom had died, according to medical journal Lancet.

In the following 30 days, MRK plummeted 42.3%, from $45.07 to just $26.. By the end of 2005 shares were down nearly 48.6%. It wasn’t until October 20, 2006, 538 trading days later, that Merck & Co’s share price crested $45 again. If you had bought the dip and held for one year, your return would be nearly 15 points higher than the S&P 500.

ConAgra (CAG) was forced to recall its Peter Pan Peanut Butter in January of 2009 after salmonella was found in shipments from its now-defunct supplier, Peanut Corporation of America. ConAgra and other sources still deny that any ConAgra-bound shipments were among those infected, but the public’s loss of confidence had a drastic impact on the stock.

ConAgra’s share price fell 21.54% over the following 31 days and didn’t recover until 57 trading days after the recall. As the chart below shows, ConAgra was also victim to a broader market downturn. In the year following its bottom-out price, ConAgra beat the S&P 500 by 30.7 points.

In January 2010 Toyota Motors (TM) was hit with a compounding blow. Just months before, Toyota had issued recalls concerning floor mats catching on accelerator pedals. The first of many 2010 recalls dealt with North American and European versions of Toyota and Lexus models whose pedals themselves were faulty.

On January 21, 2010, shares of TM closed trading at $90.42. Over the next 159 days, prices sank 25% and stayed below their January 2010 level until February 2011, 278 trading days later. Toyota’s one year total return underperformed the market by 8.4 points.

Perhaps one of the more damning in recent memory is Volkswagen’s(VLKAF) emissions test scandal. In September 2015 the U.S. Environmental Protection Agency (EPA) issued a notice to VW for violation of the Clean Air Act. It was found that the German automaker had intentionally programmed diesel engines to activate emissions controls only when being tested; the engines emitted up to 40 times as much nitrogen oxides during normal driving. Volkswagen later pled guilty to criminal charges.

Between September 18 and October 10, 2015, just 11 trading days, Volkswagen shares fell 36.25%. It would take 552 trading days, until October 2017, for shares to recover. Since bottoming out. Volkswagen’s total return outperformed the S&P 500 by 14.3 points.

Chipotle Mexican Grill (CMG) has prided itself on the quality of its food supply chain since its founding. But since 2015, E. coli has put a tear in that proverbial tortilla wrap. Initially in 2015 and again in 2017, Chipotle restaurants across the country were shut down after hundreds of customers fell ill, and some were hospitalized, by tainted beef and other cross-contaminated food product.

In October 2015, CMG was trading at $750.42; share prices bottomed out on February 13, 2018 at just $251.33, a 66.5% discount. Through three years and two separate occurrences of E. coli, Chipotle is still yet to recover to the $750 high watermark. Since hitting a bottom in early 2018, Chipotle’s one year total return is 138.6% compared to the S&P 500’s 3.4%.

So what can investors learn from history? It’s complicated. There’s a large disparity between minor and major incidents of this sort. Again, we acknowledge that this comparative analysis includes no efforts to normalize for other macro, sector, or company events.

On one end of the spectrum, Johnson & Johnson acted quickly, took control of the situation, and its stock price bottomed out after 6 trading days, recovering only 34 trading days later.

At the other extreme, Chipotle, apparently less adept at crisis management, hit rock bottom after 611 trading days has been off its 2015 high for 893 days and counting.

The table below summarizes each company’s price performance since their respective crises. The rightmost column shows relative return as compared to the S&P 500’s performance over the same time period.

So what can history teach us? Based on the sampling above and noted analysis limitations, if investors are prescient enough to buy at the floor after the crisis, on average they will meaningfully outperform the market over the next 12 months.

Specific to Boeing…whether its stock soars again hinges on more than a few historical anecdotes from the crises of other public companies. Will the jet manufacturer be found criminally liable like Volkswagen? Perhaps, like ConAgra’s sticky situation, it’s nothing more than consumer sentiment and there’s actually nothing wrong with the product. As ConAgra investors will tell you, it really doesn’t matter, shares fell 28% over the month following.

Whether you’re holding Boeing stock or trying to buy the dip, you should consider the capabilities of Boeing’s management, the public’s faith in their product, and regulators’ potential next steps.

Sound complicated? It is, but that’s why they call it gambling. Err… investing.

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