According to SEC filings, hedge funds have been increasing their holdings in Boeing (BA 1.28%), ExxonMobil (XOM 0.90%), and heating, ventilation, and air-conditioning (HVAC) company Carrier (CARR -0.11%) in recent times. So let's take a look at all three to see if they are stocks worth buying or not.
Boeing and ExxonMobil
In a way, these two completely different businesses deserve to be lumped together. The argument behind this logic is that they are both leaders in their respective industries and they are both reflective of a key view that the market might be taking over a specific end market. In ExxonMobil's case, it's obviously the price of oil, while Boeing investors will always key off of conditions in the commercial aviation market.
As you can see below, both stocks have had a fantastic 2021 so far.
Data by YCharts
Why ExxonMobil and Boeing soared
Simply put, both stocks were previously disregarded by the market because investors didn't want exposure to the price of oil or commercial aviation. As such, any potential upside surprise from these end markets was likely to lead to a significant rerating as the stocks climbed a wall of worry. Of course, "smart" investors tend to understand these concepts and buy in early in anticipation of an event that they might not think will happen.
The end of that sentence is in italics to highlight a point that's tricky to understand, so bear with me while I explain. Let's say that you thought there was a 70% chance that the price of oil would go to $36 a barrel from $47 a barrel at the start of the year, and this would lead to a fall in ExxonMobil's share price to $35 from $41.5.
Image source: Getty Images.
Furthermore, you think that there's only a 30% chance that the price of oil would rise to $58 a barrel from $47 a barrel at the start of the year, which would lead to a rise in ExxonMobil's share price from $41.5 to $62.
In other words, you think that there is a 70% chance that ExxonMobil's share price will be $35, and a 30% chance it will be $62. Therefore, the expected price of the stock is 70% times $35 added to 30% times $62, a calculation that results in a figure of $43.1. This is a figure ahead of the $41.5 that ExxonMobil traded on.
All told, you should invest even though you think there's a 70% chance ExxonMobil's stock will be lower. This is a difficult thing for many investors to do.
I'm aware I'm selecting numbers to demonstrate an example. However, the key takeaway is that it's very difficult to know where the price of oil will go, and there was a value opportunity in buying oil-related stocks earlier in the year. As events transpired, the price of oil did go to $66 largely due to efforts by OPEC and actions to restrict supply.
Image source: Getty Images.
It's a similar story at Boeing in terms of the value calculation, but here again, there's been some positive news flow that has led to a dramatic rerating. Not only is there some tentative good news on aviation in terms of business jet flights and China domestic flights growing compared to 2020 and 2019, but Boeing is believed to have started winning orders on the 737 MAX from a key customer, Southwest Airlines.
Carrier
It's a somewhat different story at the HVAC company. Carrier started 2021 in flying colors with investors warming to the company's combination of cost-cutting measures and growth initiatives. In a nutshell, the idea behind buying the stock is that management has an opportunity to significantly grow earnings now that it's free from the shackles of being tied to a larger company -- in his case the former United Technologies.
Unfortunately, that thesis received a jolt in February upon the release of a set of fourth-quarter earnings that came in lower than expected. Also, full-year guidance was lower than many had expected. The stock sold off.
Image source: Getty Images.
However, the devil is in the details, and the reasons for the disappointing earnings and guidance came down to a combination of unexpected one-time item costs and a pull-forward of investments for growth in 2021. After adjusting for these events, Carrier actually beat its own guidance for 2020, and earnings guidance for 2021 was ahead of what Wall Street was expecting.
Trading on 21 times expected free cash flow (FCF) in 2021, and with analysts expecting mid-teens growth in FCF over the next few years, Carrier remains a good value option.
Are these stocks to buy?
I'll cut to the chase. For the reasons articulated above, Carrier is a yes. If you just want exposure to oil, then ExxonMobil is a viable option, just be aware that the stock has had a great rise and it remains extremely difficult to predict where oil prices will go, particularly as the market is being impacted by artificial supply constraints that could disappear at the next OPEC meeting.
Finally, while commercial aviation is an extremely attractive market to invest in right now, Boeing may not be the best way to get exposure. Boeing needs to convince investors regarding its production issues, the 737 MAX needs to continue winning orders, and Boeing must ramp up production to significantly boost profit margin. A lot of things need to come together, and investors will need to be patient.
