Boeing Stock Got Hammered. Why This Analyst Downgrade Terrified Investors.

Boeing stock has fallen to its lowest level since 2022 after a downgrade from a Wall Street analyst put a number on one of investors’ worst fears: stock dilution.

Wells Fargo analyst Matthew Akers on Tuesday downgraded Boeing stock to the equivalent of Sell from Hold. His price target was reduced to $119 a share from $185.

That is the lowest target price on Wall Street by almost $70 a share, according to FactSet. At $119 a share, down about 30% from recent levels, Boeing would have a market value of roughly $73 billion, levels not seen since early 2020 during the Covid-19 pandemic.

Boeing stock closed down 7.3% at $161.02, while the S&P 500 and Dow Jones Industrial Average were off 2.1% and 1.5%, respectively. It was the lowest close since Nov. 4, 2022, when it finished at $160.01, according to Dow Jones Market Data.

“We think Boeing had a generational free cash flow opportunity this decade, driven by ramping production on mature aircraft and low investment need,” wrote Akers. “But after extensive delays and added cost, we now see growing production cash flow running into a undefined new aircraft investment cycle, capping free cash flow a few years out.”

At this point in its product cycle, Boeing simply should be generating north of $10 billion in free cash flow a year. However, production and quality problems have pushed output lower and added costs. Wall Street sees Boeing using almost $8 billion in cash to fund operations in 2024.

What is more, Boeing likely will need to design a new single-aisle jet in the coming years to better compete with the Airbus A321 family of aircraft. That will take tens of billions of dollars spread out over several years.

Akers sees $30 billion in equity being raised by 2026 to help cover the cost of new investment. Some of that hefty total will go toward repairing Boeing’s balance sheet. The company ended the second quarter with more than $53 billion in long-term debt, up from less than $11 billion at the end of 2018, before the pandemic and significant problems with Boeing’s 737 MAX jet.

Raising $30 billion of equity at recent prices would require issuing roughly 190 million new shares, increasing the share count by about 31%. All things being equal, a higher share count reduces earnings per share.

“If Boeing were to postpone new plane development for several more years (launch early next decade) and instead just pay down debt, we estimate free cash flow per share could grow to about ~$20 late this decade,” added Akers. That might justify a $150 share price in coming years, but postponing a new plane would mean “ ceding significant narrowbody share” to Airbus.

Narrowbody is industry jargon for single-aisle aircraft such as the 737 MAX or A320.

Raising equity and offering customers a new plane, or not offering a new jet and holding off on raising equity: Boeing doesn’t have easy choices to make in coming years.

Overall, 60% of analysts covering Boeing stock rate shares at Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. Even though Boeing’s Buy-rating ratio is above average, it has been sliding. Coming into the year, before an emergency- door plug blew out in midair on an Alaska Air flight on Jan. 5, the ratio was north of 75%.

The average analyst price target for Boeing shares is about $214.

Wall Street’s hottest trade has gone ice cold.

For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.

The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.

Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.

“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.

Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.

Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.

Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.

“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.

Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.

“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”

Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.

Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”

The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.

The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.

These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.

Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.

The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.

Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.

Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.

And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.

“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”

Boeing Stock Got Hammered. Why This Analyst Downgrade Terrified Investors.

Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.