A Value View on Boeing

04/01/2016 10:00 am EST

Focus: STRATEGIES

Russ Kaplan is a long-term value investor, focused on high quality companies. Here, the editor of Heartland Advisor walks us through the fundamental thinking behind his analysis and how he applies it one of his favorite long-term investment ideas.

Steve Halpern:  Joining us today is Russ Kaplan, editor of Heartland Advisor.  How are you doing today Russ?

Russ Kaplan:  Just fine, thank you.

Steve Halpern:  Well thanks for joining us.  One reason I’m such a fan of your research is that you don’t just tell investors what to buy.  

Instead you share the thought processes underlying your decisions in order to help educate your subscribers and help make them better investors.  It’s really a terrific process.

Russ Kaplan:  Thank you.

Steve Halpern:  Now to begin, could you give a brief overview of value investing and the key principles that underlie you overall philosophy.

Russ Kaplan:  Yes, it’s basically intrinsic value.  We’re buying shares of a company.  We buy shares as if we were buying the entire company.  We’re not in it for the short term, one quarter doesn’t matter, what the Fed does, doesn’t matter.  

We try and find out what it is worth, do things like cash flow and look at the fundamentals and do the quality of management and do a very thorough analysis of each company.

Steve Halpern:  You recently reiterated your buy recommendation on Boeing (BA).  First, could you give us a quick overview of the company’s history and its role in the aerospace market?  

Russ Kaplan:  Yes, it got started in 1916, shortly after the Wright Brothers did their invention and aerospace was way different in 1916 and it’s now 100 years later.  

They’ve been able to adapt to every new technology and even develop some of their own and they have got a great management and I see them keeping up with technology in the future.  

They’re the biggest company in that market.  Their competitor, Airbus, is privately traded, but they are doing terrific.

Steve Halpern:  Turning to the value investing approach that you use, can you highlight some of the factors behind the original recommendations for these shares.

Russ Kaplan:  Well, I thought the company would be worth more based on cash flow and a number of reasons than it is today and it has gone down from $159 to its current price of $129.  

That’s way too much of an overreaction caused by one quarter of bad earnings and a government investigation into accounting practices.  

I haven’t heard anything.  I don’t think they’re going to find anything, so it’s the psychology of the market.  People overreact and they’ve taken the price of Boeing down to a ridiculously low level.

Steve Halpern:  So when a stock like this that you’ve held for the long term falls back, you tend to not panic, rather you simply reassess the situation to determine if the fundamentals have changed or if the fact is simply offering a buying opportunity.

Russ Kaplan:  Yes, we see what the fundamentals are, if anything has changed and if it hasn’t, like with Boeing, that’s a good opportunity to take a position or if you already have some, to add to your position.

Steve Halpern:  Speaking of adding to your position, after your recent reassessment of Boeing, you determined that the stock was still a buy and you explained to your subscribers that it became a good candidate for what you call averaging down.  For our listeners who may not be familiar, could you explain what that means and how that helps position you in the long term in the stock?

Russ Kaplan:  Yes, it does.  You, again, if something goes down, you reassess it, you buy more and that makes your average price go down, so you’re in even better shape when things return to normal and the stock price returns to normal.  

Steve Halpern:  Again, our guest is Russ Kaplan of Heartland Advisor.  Thank you so much for your time today.

Russ Kaplan:  Always a pleasure.

Steve Halpern:  Thanks.  

By Russ KaplanEditor of Heartland Advisor

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