The TSX Composite Index has been bearish for the past two months on the back of the shift in the government stimulus package. From September, many people returned to work and the economy reopening gathered momentum. The index fell 3% from its September high. The virus stocks that surged in the pandemic rally saw a correction. Even the beaten-down stocks dipped.
Two stocks that were the worst affected by the pandemic, Air Canada (TSX:AC) and Suncor Energy (TSX:SU)(NYSE:SU), dipped 13% and 21% in the last two months. Investors have all the more reason to be bearish on these shares, as they expected a recovery in the third quarter, which didn’t happen.
The Canadian government extended air travel restrictions till October 31, dampening AC’s hopes of flying internationally. OPEC+ increased oil production over hopes of an increase in oil demand. but demand didn’t recover. This reduced oil prices below $40, pulling down Suncor’s stock.
The next big blow will come in the third-quarter earnings. Investors are already bearish and expecting another quarter of losses. If the two companies report slightly better earnings that assure investors that a recovery is in the cards, their stocks could surge; if otherwise, they could slump.
Air Canada stock
AC will report its earnings on November 3, and the weak earnings of its U.S. counterparts have set a bearish tone for it. The top four U.S. airlines saw an 80-100% sequential increase in revenue, but most of this revenue came from cargo and loyalty programs than passengers. Their losses increased sequentially in dollar terms, as their expenses surged along with revenue.
Three of the four airlines’ net debt increased, with American Airlines’s net debt surging past $24 billion. These airlines don’t have high expectations for October, as leisure travel demand slows after Labour Day.
Such a bleak outlook for the airline industry pulled down AC stock. In early October, I’d warned against investing in AC, as the earnings month would not bode well for the airline. The earnings have reignited the fears of bankruptcy, as capital is gradually drying, and the low demand for air travel is burning up the liquidity. Time is of the essence for AC, as its $9 billion liquidity in the second quarter will dry up in 18 months. Now, the Canadian government is touting the idea of buying a stake in AC if the airline needs a bailout.
All the bearish sentiment makes AC a high-risk stock. But you can still make money from this stock in the short term. It is still holding on to its $14-$20 price range. The stock could breach this range and fall below $14 on weaker-than-expected earnings. But if the stock maintains the $14 price post-earnings, you can buy it at this price. Any update on easing of air travel restrictions or a bailout would push the stock up. Sell the stock when it reaches $19, making a 25% profit in the short term.
Suncor Energy stock
Similar is the case with Suncor. The share has been pretty volatile last month, trading in the $15-$17 range as oil prices fell, and U.S. airlines painted a bleak picture of air travel demand. Jet fuel is made from crude oil and is an important source of revenue for Suncor. The overall outlook for the oil industry is bleak.
Suncor stock fell 15% ahead of the second-quarter earnings, when it cut dividends by 55% and posted a loss of $614 million. The investors are pricing in their worst fears ahead of its third-quarter earnings on October 28. If investors’ concerns are overblown, the stock will surge.
Suncor shares have been trading at a $14-$23 price range as the oil price was above $40. But the stock has been steadily declining since September, as oil prices fell below $40. Buy the stock at $14 post-earnings. The stock will surge when the oil price rises. Sell the stock when it reaches $22, making 57% profit in the short term.
The two stocks may breach the lower end of their price range. In that case, exit the stock while you still can to limit your downside risk.