The year 2020 is about to end, and if there is one word that defines it well, it would be uncertainty. The year started with uncertainty related to a new virus from China that, within weeks, spread worldwide. COVID-19 took a big toll on investors’ sentiments in the first quarter and led to a big market crash.
The airline industry became one of the biggest victims of the coronavirus crisis this year. As a result, airline companies’ shares tanked, including the Canadian flag carrier Air Canada (TSX:AC).
2020: Starting and ending with uncertainties The market recovered sharply in the next couple of quarters. But the year is ending with even more uncertainties for the airline industry, as a new coronavirus strain recently renewed investors’ fear about more air travel restrictions.
In such difficult times, we can only hope that the year 2021 will end the ongoing pandemic-related uncertainties and the airline businesses will get back on the financial growth track. In such times of extreme uncertainties, we must take lessons from one of the world’s best investors.
Invest like Warren Buffett Warren Buffett is certainly one of the greatest investors of our time. He has made a fortune investing in stocks like no one else. That’s why it’s worthwhile to understand how he manages his investments and what he thinks about the airline industry’s present condition.
Buffett is well known for taking great investment decisions amid uncertainties. Earlier this year, when his investment firm Berkshire Hathaway (NYSE:BRKa) sold the shares of airline companies, many disagreed with Buffett’s decision, arguing that he possibly made this decision in a panic amid the pandemic. But the airline industry’s ongoing — and seemingly long-lasting — troubles have proven him right again.
Don’t trust Air Canada stock in 2021 After losing 67.5% in the first quarter of 2020, the biggest relief for Air Canada came in November when its stock staged a sharp recovery. But the stock is still down by 54% on a year-to-date basis. Its November recovery was primarily based on investors’ hopes that the upcoming COVID-19 vaccine could put an end to Air Canada’s troubles. However, these hopes were far from reality, in my opinion.
Even if everything goes right with the vaccine distribution, it won’t put an end to the largest Canadian airline’s immense financial troubles. Air Canada has been burning huge cash for the last couple of quarters.
In Q2 and Q3 combined, it has lost around $2.4 billion. You can’t expect Air Canada to magically be back on the path of profitability anytime soon — especially with a huge reduction in business travel.
It might take the airline years for it to recover these losses, I believe. And without some concrete signs of a fundamental recovery, Air Canada stock might not recover sustainably — not even in 2021. Also, the recent emergence of more coronavirus variants could increase its troubles.
That’s why I completely agree with Buffett’s decision to offload his airline holdings earlier this year.
Bottom line Instead of waiting for Air Canada stock to recover, you could cut your losses short and invest the same money in some great undervalued growth stocks right now. Many small tech companies — which are benefiting from remote work culture — could turn out to be the next Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) in the coming years, helping you get super-rich.
The post Warren Buffett: Don’t Trust Air Canada (TSX:AC) Stock in 2021 appeared first on The Motley Fool Canada.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon and Netflix. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), and Netflix and recommends the following options: long January 2022 $1920 calls on Amazon, short January 2022 $1940 calls on Amazon, short January 2021 $200 puts on Berkshire Hathaway (B shares), and long January 2021 $200 calls on Berkshire Hathaway (B shares). Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.
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