Why did the stock price go down for so many sectors during the COVID-19?
Consider an airline like Air Canada whose share price dropped to almost half in the past two months. Stock prices change with supply and demand so many more people must have been selling the shares of Air Canada.
Why did people sell their shares? Isn't it obvious that once the pandemic is over, the prices would go back up? So technically, you wouldn't incur a loss. Of course, this would not apply to short sellers but not everyone would be short-selling. Moreover, since share price is so low now, wouldn't this be the best time to buy stocks like Air Canada?
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Air Canada owns planes. It also has lots of people who work there, pilots, air stewards, ground crew.
During Covid-19 it has very little income but it still needs to
pay to store the planes somewhere
service the planes
pay its staff
pay for take off and landing rights (slots). While it's not using these right now it will want the right to take them up again after the crisis.
If it goes bankrupt the shareholders won't see the upside once Covid-19 is over, the new owner will.
If you think Air Canada will survive it may well be a good point to buy stock, if not then not. So it all depends on how long you think Covid-19 disruption will last and whether the Canadian government will prevent the airline from going bankrupt.
Even if it doesn't go bankrupt, it will have to pay back any money it borrowed to survive the crisis and we might all be more reluctant to fly for some time to come too. We're all likely to be somewhat poorer as nations given the high levels of unemployment that are now being seen and taxes may rise to combat that resulting in us flying less. All of these effects are hard to predict.
Something similar likely applies to many other sectors, employees and assets don't just wait inertly.
Consider an airline like Air Canada whose share price dropped to almost half in the past two months.
One word: debt. Those who have loaned money to Air Canada have a higher right to its assets than those who are the shareholders.
Most companies have debt.
What people often fail to realize is that if a company that has as much debt per share as it has share value, falls to half of its value, its debt-free value decreased by only 25%.
So, if a share used to cost 0 and carried with it 0 of debt, the total debt-free price was actually 0. Now if the share costs today, it still probably carries with it 0 of debt, so the total debt-free price is now 0.
Today, I see that Air Canada has per-share long-term liabilities of 59.07 CAD.
Its share price is 18.24 CAD. The share price had a high of 51.08 CAD.
You might think it fell to 35.7% of its highest value (a 64.3% drop). It did not.
The true calculation is that its debt-free price had a high of 110.15 CAD and now it's 77.31 CAD. That's a 29.8% drop.
If a company whose business disappears entirely with no foreseeable return back to normal business for the next year or so (it'll take more than a year to develop a vaccine), drops only 29.8%, would you buy its shares?
I would not.
As an aside, if buying shares of a company with per-share long-term liabilities of 59.07 CAD and share price of 18.24 CAD, you are not buying something like ordinary shares at all. You are buying something like options. Options to own a business by paying back its debts.
For the long term, option investing is not good.
The big assumption you made is that the stock price will recover back to its original level soon. There are a lot of assumptions built into that:
One specific to airlines: many people have been forced to use teleconferencing, and discovered how effective it can be. There is the possibility that this will lead to a long term decline in business travel. And as @jamesfq notes, it's pretty much a certainty that until vaccines are in widespread use, many people will think twice about packing themselves in like sardines and travelling half way round the world.
Even if airlines return to 'business as usual', they will have accumulated a lot of debt. That's all effectively coming out of shareholder's pockets. Also others may have a hole in their budget through lost production or unemployment and be cutting back on work travel or holidays.
If they get a government bailout, there may be strings attached. For example, companies are going to be wary of taking government money and paying out dividends. Governments are going to have a huge hole in their budgets, and that's likely to mean increased taxes coming down the line, which may last for years.
Even if you personally think the share price is likely to recover, other shareholders may accept a cash buyout (including a government one) at depressed prices.
The company may actually go bankrupt.
Selling before the price has dropped too far from the peak and trying to buy at the bottom are pretty much two sides of the same coin here. Standard warnings about trying to time the market apply.
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