If there’s one thing that the markets have shown us in the last three to six months, it’s that bullishness is still in vogue. That’s great for stocks, especially considering the disastrous March selloff and the prospect of a drawn-out recession.
But will a V-shaped recovery in the markets necessarily translate as such in the actual economy? And which stocks should investors spend money on ahead of a full-blooded rally?
A recovery will transform these stocks
Bullishness in the markets is one thing, but it needs to be commensurate with consumer demand. Luckily, people are still driving growth despite the lockdown. Yes, some sectors have been crushed by the sudden change in the social dynamic.
Just look at the airlines, which are facing a probably cull in fleet sizes and near- to mid-term reduced carrying capacity. Other areas are still seeing growth, however, such as e-commerce companies.
However, the sharp growth will not come from names that outperformed during the pandemic. Rather, a V-shaped recovery upside will be generated by beaten-up sectors. Air Canada (TSX: AC), after it finally reaches the bottom, will have nothing but upside once Canadians take to the skies once more.
Manulife Financial (TSX: MFC)(NYSE: MFC), beaten down by impacts to the insurance industry by COVID-19, could also spring back.
Airline stocks are a risky play right now, and there is certainly no other way to cut it. Investor sentiment was both exemplified and solidified by Warren Buffett’s u-turn on airlines earlier this year. Berkshire Hathaway, sensing danger, dumped related assets quicker than the contents of a chemical toilet.
But what the Oracle of Omaha is missing here is that once certain aerospace businesses bottom out, they could be composed entirely of solid gold upside — if they survive the recession, that is – and that’s one monumental “if.”
Bankruptcy is a very real possibility for airlines in the current market. Investors should therefore single out airline stocks that are a) close to bottoming out, and b) in line for federal intervention.
Selected airline stocks could skyrocket
One stock that fits this description to a tee is Air Canada. However, Canadian investors shouldn’t wait for the bottom with this name. A rally could come at any moment, especially with the amount of (possibly unwarranted) bullishness buoying the markets.
Instead, would-be Air Canada shareholders should divide up an eventual position and buy in stages of incremental weakness.
The same goes for Manulife. Both stocks are leaders in their fields, and both have been beaten up by the same brutalizing market forces. The mechanism of recovery will suit both names in the same way, in the same time frame. Therefore, future – and current – Manulife shareholders should consider building a long position in this top insurer over a period of around three-to-12 months.
This period corresponds with the rough time frame for a successful vaccine rollout. Since market recovery is going to be positively correlated with the control of COVID-19, investors should pace themselves accordingly.
Portfolios can be managed during this time by employing a build-and-trim method, shedding underperformers on rallies and building on weakness.
