In the current volatile market environment, investors need to identify and avoid risky stocks such as Bombardier (TSX:BBD.B) and look to buy recession-proof stocks such as Fortis (TSX:FTS)(NYSE:FTS).
I have been bearish on Bombardier for a while now and for good reason. It continues to disappoint investors and has wiped out billions in portfolio value. Bombardier shares are currently trading at $0.46 and have lost over 75% in market value since the start of 2020.
Airline stocks have been hit hard in the ongoing bear market. As governments have shut borders, air travel has come to a standstill. But Bombardier had problems long before the COVID-19 pandemic.
Bombardier has massive debt
Bombardier’s shares fell after it announced preliminary fourth-quarter results in January 2020 that were less than impressive. The company reported sales of $4.2 billion, below analyst estimates of $4.6 billion. Its adjusted earnings before interest and tax (EBIT) loss stood at $230 million and it cut free cash flow by $650 million.
Bombardier ended 2019 with debt of $9.82 million, cash of $2.77 billion, and operating cash flow of -$680 million. In February, it announced the sale of its transportation division to Alstom and use these proceeds to reduce the massive debt that stands at eight times its market cap. Bombardier will receive US$6.4 billion from the sale and another US$591 million as part of its exit from the A220 program.
Now, it seems like the COVID-19 could not have come at a worse time for Bombardier. Airline orders are expected to fall significantly this year and global travel is expected to recover at a slow pace. This will put further pressure on Bombardier’s weak financials making it a no-go for long-term investors.
Utility stocks such as Fortis are safe bets
For TFSA investors looking to buy stocks in a market correction, utility stocks, including Fortis (TSX:FTS)(NYSE:FTS) are solid bets. Fortis is a diversified electric utility company, with a forward yield of 3.6%. It makes a good hedge against the economic downturn. If case recession fears come true, unemployment rates will shoot up. This will put a strain on consumer spending, but everyone will continue to pay their gas and electricity bills.
Fortis has a geographically diversified business and serves millions of customers in Canada, the United States, and the Caribbean. Around 99% of its sales are regulated. The company also has a stellar track record of paying dividends, something it has done for 46 consecutive years. The company now aims to increase dividends at an annual rate of 6% over the next four years.
Fortis has increased investor wealth significantly in the last two decades. An investment of $10,000 in Fortis stock at the start of 2000 would have generated close to $150,000 by the end of 2019.
Fortis is investing heavily to gain traction in the high-growth renewables market. It has allocated $18.8 billion in capital expenditure over the next five years, which will continue to drive cash flows in the upcoming decade.
During the financial crisis of 2008-09, Fortis managed to grow its earnings and also increase its dividends. It is a company with strong fundamentals and one that has survived multiple recessions.
