Boeing: Short Sellers Collectively Yawn At 737 MAX Issues – The Boeing Company (NYSE: BA)

Before I begin, I will only remind readers on the timeline of the events of 737 MAX as it will be relevant:

• 29. October 2018: The Lion Air plane crashes moment after shooting in Indonesia and kills 189 people
• 28. November 2018: Ethiopian Airlines radiation crashes shortly after launch and killed 157 people.
• 12. March, 2019: Boeing promises an update on flight control systems just hours after the FAA issued an advisory mandate design change.
• March 13, 2019: The United States justifies the Boeing 737 MAX, which follows the leadership of the EU and other countries
• 19. March 2019: CEO of Boeing, Dennis Muilenburg, wrote an open letter addressing security issues.
• 22. March 201[ads1]9: PT Garuda Indonesia became the first airline to cancel 737 MAX orders with Boeing. [19659003] April 4, 2019: Incorrect sensor data was offi
• 15. April 2019: Not a surprise was filed a shareholder lawsuit claiming that Boeing misled investors at 737 MAX problems.
• 15. April 2019: American Airlines (NASDAQ: AAL) joined Southwest (NYSE: LUV) by canceling 737 MAX aircraft by mid-August.

Since the second crash in March (Ethiopian Airlines) there have been nearly fifty surveys written here on Seeking Alpha at Boeing (BA). I counted. There is a lot to write, even for one of the most popular Dow Jones components. Out of all these articles, only two did not mention the 737 MAX question, either directly or in passing. Many of these articles outlined the risk of Boeing in terms of potential future commitments, cancellation of flight bookings and possible signs of poor management. Fear was palpable.

It is a group of investors who are known to love negative news events and the fear of fear: short sellers. Much harmed by smaller investors, bulls often love to find a group to blame for losing money. While Boeing's holdings had probably rallied along with the rest of the market to start the best first quarter for over twenty years, it's down 15% from its 2019 heights. No surprise, there are some cruel feelings among the believers in Boeing. But is the computer support that is driven by shorts or just a loss of faith?

Short Interest

Short sellers have just not seen Boeing's trials and troubles as an opportunity. According to the Wall Street Journal – or really a source reporting short-term interest rates in New York stock exchanges sold cards on Boeing actually peaked on February 1 – before the second accident. In fact, stocks have kept short just moved a smidge higher.

This is a strong difference from July 2016 when stocks held short on Boeing were over 30mm, six times higher than it is today. At that time, the bears were very interested in the company. After several cumulative billions of dollar fees against 747, 787, KC-46 and other programs – not to mention earnings guidance cuts and production shortages – so the future looked bleak. It was the most shorter share on Dow Jones.

Today, Boeing has the lowest short interest of any of the Dow components. This was probably a bit surprising to me. This means that the sales pressure has come from a long time to lose faith and profit – not short sellers jump on the bandwagon to take advantage of tragedies.

Why lack of interest? While there are probably a couple of negative events that can / will occur as a result of the 737 MAX issues:

• Potential compensation for airline and leasing companies for disturbances.
• Further changes in expected deliveries and order activity.
• Direct cost for implementing the software upgrade.

The fact is that these costs are likely to be relatively small, and will only change the time of cash flows and not the total sum. Demand is still healthy, and even though customers are less likely to spend more money, the Boeing balance has to absorb some pain from lack of initial cash development as long as flight sales prices remain stable. From now on, there has been no significant change there. Most analysts estimate direct costs to Boeing at less than $ 1B after insurance, small potatoes for a company of this size. In my opinion, the worst thing we'll probably see, Boeing is exercising a little more discretion on its $ 20B share purchase program due to the cashless cash flow.

Takeaways

I (generally) subscribe to the idea that short interest is very predictable. Back testing has shown that high short-term interest rates are a good indicator of poor future return on equity. As a group, short sellers tend to be very informed traders who are very good at spotting anomalies in valuations. They play an important role in the markets through price discovery. For Boeing bulls, their lack of interest is a sign that the media might make a big case out of nothing.

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