The TSX Composite Index returned to growth this October when the Justin Trudeau government announced the second phase of COVID-19 benefits. The index rose 2.4% from September 23 to October 2 after falling 5.3% during the September 2-23 period. However, two stocks did not recover along with the market. Air Canada (TSX: AC) and Suncor Energy (TSX: SU)(NYSE: SU) stocks continued to decline 2.3% and 4.4%, respectively, from September 23 to October 2 after falling 11.5% and 19.6% during the September 2-23 period.
The two stocks have been constantly underperforming the market, as the COVID-19 pandemic hit them hard. Both the stocks are correlated. Suncor Energy is a fuel supplier for Air Canada. While AC is trading at its three-year low, Suncor is trading at its 16-year low. Both the companies are operating in beaten-down industries grappling with low demand, and they can do nothing about it.
What is interesting is, Warren Buffett has invested in the energy sector but exited the airline sector. But I would suggest you stay away from the two stocks in October.
Air Canada stock
AC is in a state where no matter what it does, it can’t avoid multi-year losses and huge debts. The Canadian government has extended international travel restrictions until Halloween. This marks the seventh month of low capacity for AC. For an airline that earns 70% of its revenue from international travel and spends 90% of its revenue on operating expenses, an 80-90% revenue dip is not sustainable for long.
AC is set to report its third-quarter earnings at the end of the month, and things don’t look promising. The airline is likely to report another billion-dollar loss after reporting $1.1 billion and $1.75 billion loss in the first two quarters. I won’t be surprised if it increases its cost-cutting plan yet again. It increased cost cutting from $500 million to $1.3 billion in the second quarter. Moreover, its liquidity position will fall below $9.1 billion to around $7-$8 billion as it funds its losses.
The AC stock is hovering around the $14-$20 price range. But there is a possibility that the stock could break its support and fall below $14 around its earnings release. Even before AC releases its earnings, the earnings releases of its U.S. counterparts will set the expectations for AC earnings, thereby impacting its stock price. Hence, I would suggest you stay away from AC for this month.
Suncor Energy stock
Another stock to stay away from in October is Suncor, as it is directly related to the health of the airline industry. Suncor Energy produces, refines, and retails crude oil from oil sands. Jet fuel is made from crude oil. Hence, the significant reduction in air travel has reduced the demand for jet fuel and impacted oil prices. The pandemic has also reduced road travel. People are driving less, thereby reducing gasoline prices.
The sudden dip in oil demand has made storage a big problem for all oil companies. All oil companies reported inventory write-downs and impairment of assets. In the first half of the year, Suncor reported a net loss of $4.1 billion. To lower its losses, it reduced its capital expenditures by $1.5 billion, slashed its dividend by 55%, and started a $1 billion cost-cutting program. As part of the program, it will slash around 2,000 jobs in the next 18 months.
Suncor stock has been hovering around $20-$25 price range throughout the pandemic. But in September, the stock’s support broke, and it fell below $20. If you are considering buying the stock for its 5.3% dividend yield, wait till the company releases its third-quarter earnings on October 28. It will report another quarter of losses and will continue to post losses for another year.
Suncor will return to profitability only when oil prices surge, and that will happen when the economy and the airline industry recover. All this could take another year to happen. This means any significant and sustainable growth in Suncor stock would most likely be visible in the second half of 2021.
Investor centre
AC and Suncor are high-risk stocks as huge losses and piling debt is deteriorating their fundamentals. Hence, avoid these stocks and instead buy stocks with strong fundamentals.
