While the Dow has clawed back to be down only 5% this year, there has been a wide dispersion in the returns of its 30 components. At one end of the barbell are companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ: MSFT), and Home Depot (NYSE:HD), all of which have achieved gains of at least 20%.
At the opposite end of the spectrum are Boeing (NYSE:BA), Exxon Mobil (NYSE:XOM), and Raytheon Technologies (NYSE:RTX), all of which are down more than 30% and look like contenders for the dubious distinction of 2020 Dog of the Dow.
They say every dog has its day, but will that be the case for these three laggards? Let's take a look at what has plagued these companies of late and what needs to occur for each to dig out of the doldrums.
When Will Boeing Take Off?
The ongoing turbulence at Boeing has led to the stock's 47% year-to-date decline. The fallout from the 737 MAX disasters, sinking deliveries of the 737 aircraft, and an idled travel industry will be a lot to overcome.
Commercial airliners are looking to cut costs and conserve cash in this uncertain economic environment. As the pandemic continues to cripple the tourism industry, these companies aren't likely to make many purchases and further delivery cancellations are probably forthcoming.
Business travel as we know may also be forever changed. Going forward, more meetings will be conducted virtually which means less demand for business travel and fewer planes on the runway.
Boeing as a brand may be losing its clout in the industry. Last year it was surpassed by Airbus as the world's largest aircraft manufacturer for the first time in almost a decade. Meanwhile, other competitors are swooping in to capitalize on Boeing's troubles. Manufacturers in Canada, China, and Russia are expected to start delivering planes similar to the 737 over the next couple years.
Short of a highly unexpected and accelerated economic rebound, the only potential near-term catalyst on the horizon is the resumption of the 737 MAX deliveries which are slated for the fourth quarter. If this goes better than expected Boeing could take off. If not, we could see a further descent.
There's just too much risk to jump on board Boeing at this point. The company has estimated it will take several years before the industry gets back to its long-term growth trend, but the potential permanence of changing traveler habits may prevent this from materializing. Given the uncertainty around the future of the travel industry, investors would be better to wait until the skies clear. Expect the stock to remain grounded for a while. Its place at the bottom of the 2020 Dow performers list looks cemented.
Is Raytheon Technologies a Good Value?
Raytheon Technologies, down 32% this year, has faced similar challenges as Boeing given its exposure to the airline industry. But unlike Boeing, the stock looks well undervalued here.
The company turned in a solid second-quarter performance despite swirling uncertainty around the economy and government spending. Defense product orders from the Pentagon and foreign allies have continued to roll in throughout the crisis.
But while the Collins and Pratt & Whitney military businesses have performed well, Raytheon's commercial segment has been significantly impacted by COVID-19. The aerospace products business has been crippled by supply chain disruptions, facility closures, and lower demand from airline customers. The company has also been pressured by rising imported steel costs due to the tariff wars. An increasing long-term debt balance combined with a decreasing cash position is also cause for concern.
However, these risks appear to be built into the stock price and the diversification of Raytheon's business undervalued. The company often gets lumped in with the aircraft makers, but significant upside potential exists in a few areas.
The Rockwell Collins acquisition delivered $300 in synergies last year and is on pace to reach total synergies of $600 million.
Raytheon's broad portfolio of missile systems and other defense products continues to secure new business wins from the U.S. and foreign governments. Somewhat lost in the shuffle of the second-quarter earnings report was a record $10.2 billion of defense product bookings and a $73.1 billion order backlog. Strong underlying demand in the Missile and Defense division has been flying under the radar and is likely to drive growth as the air travel industry recovers.
While it faces much uncertainty around future demand from airliners, a surging defense business gives Raytheon a favorable risk-reward profile. At 7.3x trailing earnings and 19.4x forward earnings, the stock is trading below a peer group that on average has less promising growth prospects. Investors should strongly consider launching a Raytheon position at these levels.
Is Exxon Mobil Going to Recover?
Its no secret that slumping commodity prices are behind Exxon Mobil's recent woes. The stock is down 37% this year and has been hampered by lower oil refining margins in both its domestic and overseas markets. In the near-term scheduled maintenance, expenses are also expected to weigh on the already challenged bottom line.
Oil prices and margins will continue to be dictated by the length and pace of the global economic recovery. Those seem to be anyone's guess with coronavirus cases and reopening headlines swinging back and forth daily. Certainly, positive COVID-19 drug or vaccine developments would provide some relief for Exxon shares, but those two are big unknowns.
So, for now, the stock looks resigned to wade in an oil slick until we see signs of a sustainable rise in demand or meaningful supply reductions. Over the long haul though, Exxon Mobil will be just fine. This isn't its first trip on the downside of the energy cycle roller coaster.
While less financially stout energy peers have chosen to suspend dividend payments to preserve cash, Exxon has maintained its $0.87 quarterly dividend But as strong as its capital structure is, how much longer can its bottom line get beat up before it starts to re-evaluate cashflow and dividend policy?
Even a small dividend cutback poses a risk that the stock takes another leg down as the market would likely perceive this as a pre-Armageddon warning.
Yet Exxon's strong balance sheet, capital discipline, and low-risk profile make it a relatively safe way to play an energy sector recovery. The dividend yield has gushed to nearly 8%. With energy sector sentiment near an all-time low, long-term investors willing to wait out an oil rebound would be wise to lock in the income and growth potential here.
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6 Stocks Riding the Coattails of Nikola Motor
Since its initial public offering on June 4, shares of Nikola (NASDAQ: NKLA) have surged over 130%. NKLA stock has cooled down since then and is now trading at just over a 60% premium from its IPO price of $34 per share.
Nikola isn’t alone. The entire electric vehicle (EV) market is on a tear. In addition to the surge in Nikola stock, Tesla (NASDAQ: TSLA) stock is up over 93% and Nio (NYSE: NIO) stock has climbed nearly over 160% in the same time period. But while Tesla and Nio are actually producing cars, Nikola does not even have a plant built.
With all that said, the allure of Nikola is easy to see. The company is planning on building a fleet of hydrogen fuel cell trucks powered by hydrogen fueling stations from sea to shining sea. At least that’s the plan. But that plan is years away. The company won’t even have a fuel cell truck available until 2023 at the earliest.
And while the United States has 39 hydrogen fueling stations, it’s an expensive, complicated venture. But that’s been the problem with hydrogen for nearly two decades. And that has some investors wondering what the company’s chief executive officer (CEO) Trevor Milton is really selling.
Leaving aside the question of whether Nikola is riding the coattails of Tesla, Nikola is beginning to create some significant coattails of its own. And there’s a reason for this. While Nikola is planning to compete with Tesla in the electric car arena, it’s also covering a specific niche with a semi-truck that will run on a hydrogen fuel cell.
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