Air Canada (TSX:AC) Stock Hit a Critical Point: Should You Buy or Avoid it?

It’s a long way down from being one of the best growth stocks to becoming a company cutting half its workforce down to stay afloat. Let’s see where Air Canada stands.

| More on:

Air Canada (TSX:AC)(TSX:AC.B) has been one of the most affected Canadian companies in this public health crisis. And the company isn’t alone. The whole airline sector is seeing the worst of this pandemic.

It’s not like the previous market crashes and recessions, when people didn’t fly because they were saving money on travelling. Now, people are staying on the ground and in their homes for medical reasons. Health concerns of flying are much more serious than monetary concerns. And its impact is pronounced.

Vancouver International Airport’s chief executive said in an interview that they are seeing only 10 to 20 thousand passengers a day, where they used to see at least 70 thousand passengers a day on average.

As the country’s premier airline, Air Canada is absorbing a lot of impact from low passenger activity — so much so that it’s cutting its operations by 85-90% in the second quarter of 2020 compared to the second quarter last year. The company is temporarily cutting its workforce by half, about 16,500 strong, which includes 15,200 unionized employees and 1,300 managers. The employees are on an “off-duty” status, while the managers are furloughed.

What does it mean for investors?

Substantially subdued operational activities and the “layoff” of half the workforce might not make Air Canada top the list of your potential investments. But the company is trading at an amazing discount right now. At $17.14, the share price is down 71% from its value in January. Buy-the-dip opportunities do come, but this level of dip is relatively rare.

If we look at the history of Air Canada, especially five years before the crash, the company had an amazing run. The stock grew over 300% between April 2015 and January 2020. Hypothetically, if the company regained its market value of around $50 a share and then grew 300% in the next five years, investors could get monstrous returns from this down-in-the-rut stock in the next six years.

One more thing to consider is that Air Canada doesn’t pay cash dividends. So, investors only depend upon the capital gains when they invest in Air Canada. If the government bails Air Canada out, or the company goes through significant restructuring, as it did in the past, the share price can go right up after the pandemic ends. That would mean decent capital gains for investors.

Foolish takeaway

Whether you should buy Air Canada stock now or steer clear depends on your tolerance for risk. If the pandemic rages on even for a couple of months longer, then your chances of losing everything are very high. The sooner things return to normal, the better it is for Air Canada investors.

The risk of bankruptcy is possible, so AC is a win-big, lose-big stock right now. So, if you are willing to put it all on the line, go for it. But if you want to play it safe, Air Canada might not be for you.

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 Adam Othman has no position in any of the stocks mentioned.

More on Investing

ETF stands for Exchange Traded Fund
Investing

Here’s the Average TFSA Balance at Age 54 in Canada

Here are two ways to optimize your TFSA for either growth or income via ETFs.

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

An investor uses a tablet
Tech Stocks

Canadian Tech Stocks to Buy Now for Future Gains

Not all tech stocks are created equal. In fact, these three are valuable options every investor should consider.

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

Asset Management
Stock Market

3 of the Best Canadian Stocks to Buy Right Now

Are you looking for stocks that could be a major bargain right now? These three Canadian stocks could provide some…

Read more »