It sounds risky, but are Air Canada’s shares worth speculating?
There is no doubt that such a bet on the outcome of an exogenous binary event is a speculation and not an investment amid these unprecedented uncertainties.
While there may be considerable upside potential, there is a real risk of losing the majority of your investment if the worst-case scenario does eventually wear off. This is a major reason why Warren Buffett has bailed out his airline stocks despite the upside potential and why investors should think about where an all-or-nothing speculative bet like Air Canada fits in their portfolios.
On its own, Air Canada’s stock will be an eventful race that will only suit firm-bellied investors who understand the full extent of downside risks.
For investors with a well-balanced dumbbell portfolio of pandemic resistant and pandemic affected names, Air Canada can be a solid name that could strengthen the overall risk / reward tradeoff of the portfolio, as I believe there is a high probability that the business will survive to see better days. Of course, there’s a chance I could be wrong, especially if the worst of this pandemic is still ahead of us.
Air Canada Shares: What About Valuation?
If this pandemic turns out to be over in two years, Air Canada’s action could turn out to be seriously undervalued here. At the time of writing, Canadian air transport stocks are trading at 2.4 times their book value, a low price to pay for a company that was teeming with cash more than a year ago.
In the years following the Great Financial Crisis, Air Canada significantly improved its operational efficiency. Such efforts, I believe, will not be lost for good by this crisis if she comes out of this pandemic alive. Once it’s completely safe to board an airline, Air Canada’s shares could easily climb to $ 46.
For now, Air Canada is a solid bet for the “at risk” part of your COVID-19 dumbbell wallet. Management has done a great job of increasing liquidity and conserving liquidity. However, the airline will struggle in the new normal (perhaps more than cinemas), especially if the airline needs to block the middle seat to allow good physical distance.
Without more visibility on the end of this pandemic, it’s hard to tell if Air Canada is in fact undervalued or if another transitional airline is on the way out. As such, I see investing as a type of triple speculative bet or nothing that only intrepid young investors should consider making.
If you can handle the turbulence and believe the pandemic will end in two years, Air Canada is a compelling buy right now. But please be sure to balance your exposure to COVID-19 risks as we’re probably not out of the woods yet.
You could triple your money with the name, but the catch is, you could also lose your entire investment if COVID-19 doesn’t decline over the next two years.
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Idiot contributor Joey Frenette has no position in any of the stocks mentioned.