An aviation giant, a leading air-conditioning manufacturer, and an elevator company make up a short list of stocks that hedge funds have been buying…
According to SEC filings, hedge funds were buying more shares in aviation-giant Boeing (NYSE:BA), heating ventilation and air conditioning company Carrier Global (NYSE:CARR), and elevator company Otis Worldwide (NYSE:OTIS) in the fourth quarter. Should investors follow their lead now, or is the party over for these three stocks?
A quick look at their performance shows that Boeing has outperformed the S&P 500 index on expectations of a recovery in air traffic as the vaccine rolls out and positive news flows on orders for the 737 MAX aircraft. Carrier and Otis — two companies created out of the former United Technologies — have not fared quite as well, but Carrier has managed to outpace the S&P 500 as of this writing as its stock has been up and down throughout the year.
DATA BY YCHARTS.
The case for buying Boeing could be based on the idea that “it couldn’t get much worse, could it?” That’s a way of saying that the stock looked like an excellent value compared to the doom-and-gloom scenarios that the market had baked into the stock prices of aviation stocks at the start of the year.
That said, there are plenty of stocks available for investors looking at a recovery in commercial air traffic. Boeing is an option, but to buy it, you have to believe that the 737 MAX will start to win orders over the Airbus A320 family of aircraft. For reference, the two narrow-body airplanes are the commercial-aviation industry’s workhorses.
The chart below shows the destruction in orders caused by the high-profile crashes that caused a grounding of the 737 MAX in 2019 and then the COVID-19 pandemic.
DATA SOURCE: BOEING AND AIRBUS PRESENTATIONS. CHART BY AUTHOR.
Not only does Boeing need to win orders, but it also needs to avoid cutting the price heavily in a fiercely competitive market. This is all the more important considering the company’s heavy debt load, which it has amassed in recent years. Higher interest payments will encumber Boeing, as a result.
DATA BY YCHARTS.
All told, the aviation sector is an excellent place to invest, but there are better ways to play it than buying Boeing and taking on the added risks involved. Revenue from 737 MAX could disappoint in the coming years.
Otis is the world’s leading escalator and elevator company. The investment case for buying this company rests on the idea that it can win market share in the highly fragmented and lucrative services market and, in particular, in China, the world’s largest elevator market. New equipment growth is significant, but that’s mainly because it usually leads to service contracts.
For example, the new equipment segment profit margin was just 5.9% in 2020 with an operating profit of $318 million. By comparison, the service segment profit margin was 21.8%, with an operating profit of $1.6 billion.
Management has aimed to…
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