Apart from its terrible human cost, the coronavirus has effectively ground China’s economy to a halt, with February factory activity plummeting to all-time lows and causing havoc across global supply chains.
Now, even with central banks ready to step in and cut interest rates, the economic situation will most likely get worse before it gets better. Based on where we stand, here are three stocks I would avoid during this tumultuous time.
Copper is the lifeblood of the world, being a key component of many industrial processes. Naturally, it follows that a slowdown in global growth will lead to a drop in copper prices, and subsequently the margins for copper producers.
With spot copper currently trading at USD $2.57/lb, or one-year lows, I would certainly steer clear of Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK), which derives 24 percent of its total metallurgical sales through copper.
Moreover, Teck’s last earnings report was less than stellar, as the company reported a $1.13 billion write-down on its much-anticipated Frontier, oil sands mining project, as well as 2020 outlook that factored in record high inventory levels and logistical performance issues across the company’s entire supply chain.
While 2019 was a stellar year for Air Canada (TSX:AC), the year 2020 as been quite the turbulent ride. Starting with the indefinite grounding of its 767 MAX fleet to a possible global pandemic that threatens to destabilize the travel and leisure industry, Air Canada is flying precariously through macroeconomic headwinds.
In its latest earnings report, Air Canada addressed these concerns by cutting its Q1 2020 EBITDA outlook by $200 million compared to last year — an assumption that’s contingent on resumption of service to China and Hong Kong in the third quarter of this year as well as modest Canadian GDP growth.
Should any of these two factors fail to materialize, we can anticipate further deterioration of Air Canada’s financials.
Copper is not the only commodity feeling the crunch from Corona. The recent market sell-off has also been particularly brutal for oil companies, as West Texas Intermediate crude briefly broke below US $45/bbl on Friday, stemming from oversupply concerns in the face of falling global demand.
While downside momentum for Canada’s oil patch looks to continue into the foreseeable future, one particularly poor company I would avoid is Baytex Energy Corp (TSX:BTE), whose bullish case rests on its deleveraging story.
While the company should be applauded for $394 million of debt reduction in 2019, its forward free cash flow generation is contingent on favourable crude prices, and continued pain in the oil sector will bode poorly for this debt-laden name.
More than just a threat on our lives, the Coronavirus is a massive obstacle in a healthy global economic picture. In the face of continued selling pressure in stocks, I would certainly avoid these three names mentioned above.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor VMatsepudra has no position in any of the stocks mentioned.