With a number of different ways the COVID-19 pandemic could play out over the next 12 months, investing in hard-hit sectors like retail, tourism and the airlines is not for the faint of heart.
But if you’re optimistic about the timelines, feel free to buy a beaten up stock like Air Canada (Air Canada Stock Quote, Chart, News TSX:AC), says Scotia Wealth advisor Mike Newton. Just make sure its a pretty small position in your portfolio.
Like the rest of the airlines, Air Canada has been shaken to its foundations by the novel coronavirus which has not only decimated air travel worldwide over the short term but put into doubt the health of the industry post-pandemic, where travelers may stay for some time much more reluctant to jump on a plane than they were just few short months ago.
Air Canada last Friday released its summer schedule which has less than half the destinations it had on offer a year ago: 97 compared to 220, with the resumption of service to six US airports as opposed to last year’s 53. International flights will be offered at only three locations in Toronto, Montreal and Vancouver.
The company reported as high as 95 per cent of its flights stopped in recent months and has raised the ire of passengers through its refusal to give cash back for cancelled flights, offering travel credit instead.
Air Canada had been flying high in recent years with a much-improved balance sheet and garnering praise for its successful turnaround, but that was all before COVID-19 came along. Now, the stock which pre-COVID was trading around the $50 mark has been stuck in sub-$20 territory for the past two months.
The lack of spring in the stock even caught Newton off guard.
“I purchased Air Canada [when] we did a lot of buying in the March 28 through April 1st area there. It turned out to be a mistake,” said Newton, portfolio manager and director of wealth management, who spoke on BNN Bloomberg last Friday.
“I had a big rally and then I got my head handed to me right away,” he said. “But the key to that is that the position was very small. I don’t remember if it was a point five per cent or one per cent.”
Newton said even optimists need to tread cautiously with stocks like AC, “if you are in the camp that things are going to get better and you say to yourself that ride-sharing like Uber and Lyft, hotels like Marriott and Hilton, airlines, travel agencies … that any of those categories are going to have explosive upside.”
“This is where it becomes really interesting because to start sniffing around in some of these battered areas is not a bad strategy but I wouldn’t be going guns ablazing into that space,” Newton said.
“Probably the best strategy if you’re interested is to take a small position with the understanding that you’re going to average in on it between now and September,” he said.
“But, listen, all bets are off if we don’t see a big improvement in the cases of this pandemic — in which case it’s not going to be a good investment.”