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The Bank of Canada raised the interest rate by 50 basis points and began withdrawing stimulus funds from the market. Fear of an accelerated rise in interest rates sent panic among hedge funds, and they posted profits in tech stocks. This has brought tech stocks back to pre-pandemic levels. If you bought Light trade (TSX:LSPD)(NYSE:LSPD) during the pandemic rally or Air Canada (TSX:AC) before the pandemic, you’re probably sitting in dark red.
Portfolio risk management
You can recoup losses in your portfolio by doing one of three things:
- stay invested
- Buy the dip
- Book losses and invest money elsewhere.
Deciding which of the three methods to use depends on the security, your entry point, current market conditions, and your risk appetite. It’s wise to book a loss if the stock doesn’t have significant growth potential or if you bought the stock at a very high price.
Recover losses from Lightspeed stock
If you bought Lightspeed for $100 per share, you better book a loss. Lightspeed is a fundamentally sound stock with good revenue growth prospects and a solid business model. It doesn’t have a lot of leverage on its balance sheet. But $100 per share is not the right entry point.
The stock ballooned to the $100 level in the pandemic bubble as investors poured free stimulus money into the market. The Lightspeed founder took advantage of the inflated valuation to raise funds and make strategic acquisitions to accelerate growth. These acquisitions diluted shareholder interest. A correction was therefore imminent.
But a report from Spruce Point Capital that Lightspeed inflated its customer count and hid its churn rate sent the stock down 60%. Then followed an inflationary tech selloff and rising interest rates, putting Lightspeed stock 82% below its all-time high of $165.87. The stock is currently trading at $28.58. If it needs to reach $100 to break even, it needs to grow 250%, which could take at least five years if Lightspeed continues to grow revenue organically. You lose money if you take inflation into account.
If you have realized large capital gains elsewhere, you can sell your Lightspeed shares at a loss and reduce your capital gains tax. This could probably bring you better returns by saving your tax money.
But if you own Lightspeed stock in the $20-$40 price range, continue to own the stock. You can also buy more on the current decline as the stock has bottomed out. It trades at a price-to-sales (P/S) ratio of 7.5, which is cheap for a growth stock that is a key player in the booming omnichannel commerce market. His rivals Nuvei and Shopify trade at 13.2 and 16 P/S ratios, respectively.
Recover losses from Air Canada shares
You must use a different strategy for Air Canada. The environment is not conducive to airlines. Warren Buffett sold $6 billion worth of airline stocks in April 2020.
“The world has changed for airlines.”
As airlines have huge operating costs, they must operate at full capacity for mid-single-digit profit margins. The pandemic wiped out 90% of global airline capacity and pushed AC to a net debt of $7.12 billion and a net loss of $3.6 billion in 2021.
The future is difficult. Travel demand has improved but remains below pre-pandemic levels. Additionally, the Russian-Ukrainian war pushed oil prices above US$100/share. Air conditioning was profitable when the price of oil was around US$60 a barrel and it was running at full capacity. Its stock was trading at around $50.
AC stock has now lost 50% of its valuation. It is struggling to maintain the $25 price in its current situation. Given weak fundamentals and a bleak outlook for Air Canada, it is best to sell the stock at a loss. You can declare a capital loss and recoup your losses by investing in Lightspeed at its current price of less than $30. Even if you bought AC stock at $25, there is no point in holding it for the long term, as its overall resistance has fallen from $28 to $25.