I've seen over the years that history has a sneaky way of coming full circle, just like time scratches its marks into the sands of the present. It does put on new faces, but the old stories keep playing out underneath them. For example, let's look at this curiosity: a company in your portfolio fails, and a stream of scary news stories starts. That trickle of bad luck soon turns into a steady flow of it. This happens so often that it's like inviting trouble makes room for a flood of its kind. Have you ever stopped to think about this pattern?
Cockroach Theory
The cockroach theory in investing says that when a company shares bad news, it could be an early sign of bigger problems, like how finding one cockroach usually means there are more hidden. Investors may be wary because they think the bad news is just the start of bigger problems that haven't been revealed yet. This idea can have an impact on whole industries because bad news about one company can make people look more closely at and question other companies in the same industry. Bad news like Enron and the financial crisis in the past have shown that one piece of bad news can cause investors to lose faith in similar companies or the whole industry. The theory has been associated with some major companies in history and you might have lived with them.
The 2001 fall of the energy company Enron serves as a prime illustration. Investigations into accounting discrepancies led to the discovery of systemic fraud and manipulation. As the first problem escalated and revealed systemic issues with the company's culture and procedures, the cockroach theory was used. The 2016 (WFC) phony accounts scandal severely damaged the bank's image. Millions of consumer accounts were opened without authorization because employees were pushed to fulfill unrealistic sales targets. When concerns surfaced over the bank's general ethics and methods of risk management, the cockroach idea came to light. In 2015, (VOW3.D.DX) was embroiled in an emissions controversy after the company admitted to installing software that manipulated test results. Investigations revealed that the modification affected other automobile lines after initial concerns about the problem's scope arose from a single model. The cockroach theory is on full display in this case, as a single incidence gave rise to suspicions of a systemic problem. Due to a defective ignition switch, (GM) vehicles were responsible for numerous accidents and fatalities in 2014. Delayed recollection and early attempts to minimize the issue gave rise to the cockroach theory. There was a lot of backlash and distrust after investigations showed that the company's culture put profit over safety. The cockroach idea is frequently a question of public opinion; these are only a handful of instances. Nevertheless, these instances demonstrate how a single problem might cause one to worry about the state of a corporation, which in turn could lead to the discovery of even more serious issues.
The Boeing Company
In the landscape of investment, an unwavering attachment to any stock is a gamble. Recognize the tremors of trouble at a company's door; prudent caution is the savvy investor's best defense, so if you see a company’s news starting to snowball, you may want to exit it and perhaps look at a re-enter when things are a little calmer and news flow bottoms and perhaps things become a little more favorable.
(BA) has been having a lot of problems lately that are all linked to each other. These problems affect every part of the business, from mistakes in production to issues with finances and long-term planning. One of the main problems is that quality control is still having trouble, especially with the 737 MAX. After the two fatal crashes and the worldwide halt of the planes, (BA) has been under a lot of pressure to fix the problems. Because of the pandemic, production has slowed down and experienced workers have left the company. This has led to more incidents like the one on the Alaska Airlines plane, where a door plug burst out in the middle of the flight because there were no bolts. Bugs in the way the planes were made have also been found. For example, nuts have been missing from 737 MAX rudder system pins. (BA) had to pay billions of dollars in extra costs because of problems with manufacturing, especially with the 787 and 777X models. The defense part of the company also lost a lot of money because of these problems. Besides the practical problems, there are also bigger strategic problems like a tight job market and supply chain problems that have led to big financial failures. Some people have also had doubts about the business plan. Airbus is a strong competitor for (BA) in the narrowbody airplane market, which makes it hard for the company to make up lost ground. When planes like the 737 MAX and 787 are remarketed, they make less money in cash, which could hurt the company's earnings. In news released on March 9th, Boeing acknowledged in a letter to Congress that it cannot find records for work done on a door panel that blew out on an Alaska Airlines flight over Oregon two months ago and now the Justice Department has opened an investigation. The cockroaches don’t seem to stop crawling out.
To recognize a company experiencing the cockroach theory, look for patterns of negative news that suggest deeper issues, such as financial irregularities, sudden executive departures, or product safety concerns. Consistent negative analyst reports or regulatory investigations can also be indicators. I believe this has started at (BA) and I remain short of the stock.
When Does The Company Bottom?
To gauge if (BA) has moved past its turbulent phase, observe consistent improvements in its financial health, strategic changes, or management shifts aimed at overcoming previous setbacks. The resolution of legal or regulatory issues and favorable reviews from market analysts could indicate a positive turn. Increased buying by company insiders might also suggest confidence in Boeing’s future growth. Vigilance and thorough analysis are key due to the complexity of Boeing's operations and the aerospace sector's regulatory landscape, but for the moment, it may be better to stay out until credibility is restored.
On the date of publication, Jim Osman had a position in: BA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
