More big market swings on tariff news; Small businesses on the brink; The dangers of rising bond yields and a weakening dollar; A look at earnings reports from Boeing and Chipotle Mexican Grill

1) Yesterday brought another big swing in the markets on trade-war developments...

In the morning, markets rallied strongly on news that President Donald Trump's administration was considering cutting the steep tariffs on China. (At one point, the S&P 500 Index was up about 3.4%.)

In this article yesterday, the Wall Street Journal gave more details on the potential tariff changes: White House Considers Slashing China Tariffs to De-Escalate Trade War. Excerpt:

One senior White House official said the China tariffs were likely to come down to between roughly 50% and 65%. The administration is also considering a tiered approach similar to the one proposed by the House committee on China late last year: 35% levies for items the U.S. deems not a threat to national security, and at least 100% for items deemed as strategic to America's interest, some of the people said. The bill proposed phasing in those levies over five years.

But markets gave back gains after White House spokesperson Karoline Leavitt said that there would be "no unilateral reduction in tariffs against China." By the end of the day, the S&P 500 finished with a gain of about 1.7%.

Small businesses in particular are hoping tariffs come down quickly because many are in the situation this one is in (from this WSJ article earlier this week: From Fake Eyelashes to Care Bears, U.S.-Bound Goods Are Stuck in Tariff Limbo):

Basic Fun, a Boca Raton, Fla.,-based seller of children's toys, has also halted shipments from China, hoping that tariffs recede to more manageable levels. The company has about two months of inventory of Lincoln Logs, Care Bears and other items in U.S. warehouses, Chief Executive Jay Foreman said.

"Basically, what we're doing is eating our inventory and hoping that it will last us until this gets settled," he said. "If it doesn't, we'll be out of business."

2) The below Financial Times chart in a recent post on social platform X captures how rising bond yields and a weakening dollar could exacerbate rather than alleviate our economic difficulties. It's one of the reasons I'm particularly worried about the current situation:

3) On another note, let's check in with the latest on two companies I've previously warned readers about...

First, aircraft maker Boeing (BA) reported first-quarter earnings yesterday (earnings release here and slide presentation here), and the stock jumped 6.1% in response.

Revenue rose 18% year over year to $19.5 billion, slightly beating estimates... and its adjusted loss was $0.49 per share, much better than the loss of $1.18 forecast by analysts.

But the company's numbers, while getting better, are still ugly. Take a look at the below charts from a slide in the earnings presentation:

Most important to me is free cash flow ("FCF") on the right: Boeing is still burning cash, which is why net debt rose from $27.6 billion to $29.9 billion during the quarter. I can't remember the last time I invested in a turnaround situation in which a company was burning cash and had a bad balance sheet like that.

And Boeing is in the crosshairs of the tariff war with China, as this WSJ article from yesterday notes: Boeing Will Stop Making Jets for China if Airlines Won't Accept Planes, CEO Says. Excerpt:

The jet maker wanted to highlight financial results from its latest quarter showing that the company is emerging from its yearslong financial crisis. Instead, Chief Executive Kelly Ortberg spent much of the morning Wednesday talking about a pair of Boeing jets returned by China and issuing reassurances that tariff wars won't derail the company's turnaround.

In exchanges on CNBC and on a conference call with analysts, Ortberg said that Boeing would stop making jets for China if airlines won't take the planes and that Boeing could find other buyers for jets rejected by China. He said Chinese airlines returned the planes because of high tariffs resulting from the U.S.-China trade war.

Lastly, even setting aside the weak financials and tariff risk, it's not as if the stock is cheap.

The company is expected to lose $2.13 per share this year and then earn $4.07 per share in 2026 and $7.45 per share in 2027.

That means, at yesterday's close of $172.37 per share, the stock is trading at 42.4 times next year's earnings and 23.1 times 2027 earnings.

My conclusion remains the same as when I last covered Boeing's earnings on January 29 (the stock is roughly flat since then):

Ortberg appears to be making the right calls to turn things around at Boeing, but I'm still wary of the many major problems the company faces, as well as its high debt load. I continue to recommend avoiding this stock.

4) Next up is Chipotle Mexican Grill (CMG)...

Regular readers will recall that I last wrote about the burrito chain on August 14 after coffee giant Starbucks (SBUX) poached its well-respected CEO, Brian Niccol. At the time, I showed that Chipotle has been an incredible growth company and stock.

Unlike Boeing, Chipotle has little tariff exposure, has a solid balance sheet, and generates high and growing FCF.

Nevertheless, I warned investors in my August e-mail that:

The problem is valuation. The stock is another beneficiary of the "quality bubble" I wrote about [on August 13]...

On a price-to-earnings (P/E) basis, it trades at just more than 47 times this year's consensus analysts' estimates of $1.09 per share.

Chipotle is a great company, but the stock's current sales and earnings multiples are ridiculous. I'd argue that 25 times this year's earnings would be a fair multiple, so I have no interest in the stock while it's anywhere close to these levels.

Sure enough, as of yesterday's close, Chipotle is about 6% below where it was on August 14 (it closed that day at $51.65 per share).

That isn't because the company is doing poorly – it has continued to grow nicely – but because of the high expectations built into its richly valued stock.

Yesterday after the close, Chipotle reported solid first-quarter earnings: Year over year, revenue and earnings per share rose 6.4% and 7.7%, respectively.

But same-store sales were down 0.4% due to a 2.3% decline in transactions, partially offset by a 1.9% increase in the average check size. It was the first year-over-year quarterly decline since the pandemic, missing estimates of a 1.7% increase.

And the company lowered its revenue guidance for the full year to the low-single-digit range versus previous guidance of low- to mid-single digits.

These are all such small misses that, for most companies, they wouldn't affect the stock. But at yesterday's close price of $48.76 per share and earnings estimates at $1.26 per share, the stock is trading at nearly 38.7 times this year's earnings.

Chipotle is a great company, but its valuation leaves no margin of safety. So as much as I would like to say the stock looks like a buy, I just can't do it...

Best regards,

Whitney

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