One of the biggest casualties of this market crash are travel stocks. After all, with no one traveling and with people having to stay indoors, generating revenue is going to be difficult, to say the least. Shares of Air Canada (TSX:AC)(TSX:AC.B) are down more than 60% in 2020, and that’s mainly a result of the coronavirus.
That’s unusual territory for the stock, which, from 2017 through to the end of 2019, soared more than 250%. It’s been a big cliff that Air Canada shares have gone over in recent weeks. However, investors shouldn’t be so quick to write off the stock just yet. In fact, buying today could set you up for some terrific returns later on.
But you don’t have to take my word for it; take billionaire investor Warren Buffett’s. He has multiple airline stocks in his portfolio, and he recently said he has no interest in selling. While a pandemic is serious and will impact the economy, he doesn’t believe that it will be a long-term problem, telling Yahoo Finance that “It won’t stop the progress of the country or the world.”
The economy will recover, and so will Air Canada
As one of top airlines in the country, there’s too much at stake for the federal government to not help Air Canada, especially if the airline were on its last legs — which it isn’t. The airline has more than $2 billion cash and cash equivalents on its books, and in 2019 it generated free cash flow of $3.7 billion.
As it cuts down its operations and sheds all the costs that it can, the company will still be in a good position to weather the storm. And let’s not forget that with interest rates declining yet again, it’ll be cheap for the company to raise debt if it needs to fill in any gaps along the way that may arise. It may take a while for travelers to return and for planes to be back in the skies on a full-time basis, but, at this point, there’s no reason to be concerned that the company won’t be able to recover.
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The stock is in the dumps right now and, quite frankly, it may stay there for a while. But for shares of Air Canada to double and reach around the $35 mark isn’t inconceivable; it spent the bulk of 2019 well above that price. The caveat, however, is that it may take some time before the stock gets back up to those levels again. And I wouldn’t be surprised if the stock continues to fall even further in 2020, as the pandemic continues to progress.
Even if health officials contain the coronavirus in Canada, it’ll still take even longer for it to be contained around the globe. And until that happens, many travelers will remain hesitant to go outside the country. Realistically, it may take one year, perhaps even two, for airlines to recover from the impact of COVID-19. Until the coronavirus is completely wiped out and is a non-threat, it’s going to weigh on the airline industry and Air Canada.
If you’re a long-term investor willing to buy and hang on to shares of Air Canada, you could see the value of your investment double — but you’re going to have to be patient.
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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 David Jagielski has no position in any of the stocks mentioned.