Warren Buffett has spent 2020 perplexing investors and analysts left, right, and centre. The current financial environment is challenging on all fronts due to the pandemic – something we will remember in history as a significant black sheep event. Buffett has made things more confusing by being seemingly uncharacteristic with his investment decisions.
The Oracle of Omaha stayed away from airline stocks for several decades. He referred to airlines as a disaster for capital, long before disaster struck in the form of this global health crisis. Despite his statement on airlines, he became one of the leading investors in four different airlines by 2019.
His stance on airlines changed last year, and he said, “They’re like the Chicago Cubs. And they got that bad century out of the way. The hope is they will keep orders in reasonable relationship to potential demand.”
All that changed when the pandemic struck and crushed every airline company in the world. The CEO of Air Canada (TSX:AC) said that the current crisis is worse than 9/11, SARS, or the crisis of ‘08 combined for airlines.
Buffett’s reaction to airlines
Amid the initial panic surrounding COVID-19, Buffett retained his positions in airlines. He said that he would not sell airlines back in March 2020. A few months after making the statements in support of airlines, he reduced his airline positions entirely. For someone known for making long-term bets, his divestment in airlines was a strange move.
And it’s not just the airlines, either. Buffett has remained bearish about investing in general for the past several months. He just continues to stockpile an increasing amount of cash like he expects another major market meltdown that could possibly be worse than the March bottom.
The year 2020 has been rough on Air Canada stockholders. The airline has become quite cheap for investors who have held shares for a long time. Many investors still consider it an excellent long-term buy due to the massive discount it is trading for on the stock market.
Is Air Canada an excellent long-term bet?
Any company that was soaring the skies for a long time but is trading for a low price can seem attractive to value investors. There is always the chance of upside to owning high-quality stocks with substantial intrinsic value. However, investors need to be wary of Air Canada. While it may look attractive right now, it also reported another significant loss of $1.75 billion in Q2 2020.
Air Canada has made efforts to bolster its balance sheet through $5.5 billion in new debt and equity. Still, the airline continues to burn through its cash reserves. Spending more than $15 million each day, the company is enjoying a better quarter than the last one. It does not change the fact that AC continues to lose money, which is not a good investment in my books.
Most of the failures leading to these horrible results for Air Canada are due to factors out of the airline’s control. A ship with no control over where it sails and relying solely on external factors to guide it to safety or ruin is not something that inspires confidence.
I would recommend investing in companies that can control their destiny by working through the current situation. There are plenty of non-cyclical companies trading on the TSX that can make a better bet than AC. For now, however, I would advise staying away from Air Canada.
Speaking of Warren Buffett…
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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 Adam Othman has no position in any of the stocks mentioned.