Air Canada (TSX:AC) stock is back on the retreat again, as COVID-19 cases continue to surge uncontrollably going into Christmas.
More recently, Air Canada suspended flights between Canada and the U.K. due to a new COVID strain that’s reportedly 70% more contagious. The mutated strain is currently under investigation, but it’s not believed that the new virus is deadlier or resistant to the vaccines that have already begun to rollout. In any case, investors should not discount the potential for negative surprises, as I’ve been warning in many prior pieces. While COVID vaccines are something to be hopeful about, there’s no telling just how bumpy the road will be between now and the pandemic’s end.
News of travel restrictions to curb the spread of the U.K. coronavirus strain weighed heavily on the markets on Monday, as investors grappled between positive U.S. stimulus news and the potential for further lockdowns that could cripple the U.S. economy once again.
Is Air Canada stock still worth buying as shares nosedive?
While I’m still bullish on Air Canada’s prospects beyond 2021, I’d urge investors to be careful how they look to bet on the name as a way to play a reopening.
“Air Canada looks like a stellar longer-term investment now that we’ve got renewed vaccine hopes. That said, there’s still the potential for negative surprises in the new year.” I wrote in a prior piece, urging investors to scale into a position gradually, rather than placing a big bet after the vaccine-driven run-up in AC stock.
“And unless you’re committing to hold the name for years (and not months) at a time, you could still stand to lose some big money, as a retracement after the recent run could have the potential to be vicious and unforgiving to those seeking to make a quick buck.”
Today, Air Canada stock is now down over 18% from its early December high, as investors booked profits after November’s unprecedented bounce. If you’re a young investor who’s no stranger to volatility, then I’d look to initiate a starter position on the dip with the intention of adding on a pullback back to the high teens. Shares of Air Canada are nosediving, with little in the way of technical support in the mid-$20 levels.
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Effective COVID-19 vaccines don’t mean the runway is cleared for the airline stocks
As we learn more about the U.K. coronavirus strain and its spread to other European countries, I wouldn’t rule out wider-spread travel restrictions from Air Canada and its peers. Unfortunately, Air Canada is a more internationally focused airline than some of its better-performing peers south of the border. Such a heavier weighting to international travel, I believe, puts Air Canada stock at greater risk of a vicious pullback, as COVID recovery and “reopening” plays take a breather after leading the broader stock market higher in one of the best months of November in nearly a century.
When it comes to the new strain, there are still many unknowns. The next thing you know, a 72-hour U.K. flight suspension could be extended to span weeks, then months. Regardless, Air Canada may be vulnerable to developments relating to the new strain.
Foolish takeaway on AC stock
While I think 2021 will hold the end of the pandemic, investors shouldn’t assume that the Air Canada shares will be anything less than a turbulent ride. There are still significant risks on the table, most notably the new strain of coronavirus, which may (or may not) affect efficacy rates of vaccines.
As of today, various health experts do not believe the new strain will be resistant to vaccines that were revealed in early November. As investigations on the new strain continue, however, investors would be wise to brace themselves for any potential negative surprises that could spark a reversal back to defensives and out of the “reopening” plays like Air Canada stock.
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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 Joey Frenette has no position in any of the stocks mentioned.