As far as Canadian growth stocks are concerned, Bombardier (TSX:BBD.B) has certainly seen one of the bigger moves in the market. The company, a global leader in aviation focused on designing, manufacturing and servicing the world’s most exceptional business jets, continues to be a key focal point of many investor portfolios. There’s good reason behind that, given the returns this stock has seen since dipping toward its pandemic lows.
However, I do think that at 16 times earnings, there’s reason to be cautious with this name right now. Let’s dive into why Bombardier may be one growth stock to avoid during this part of the market cycle.
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Business jet demand has boomed, but for how long?
One of the key drivers of Bombardier’s recent rise has been surging demand for business jets. The company is a leading manufacturer of business and commercial aircraft, also offering after-market service capabilities. Thus, as a beneficiary of the wider-spread adoption of business aircraft in the post-pandemic travel boom we’ve seen, Bombardier’s share price has exploded along with its revenue and earnings.
That said, I view this stock as one that’s uniquely poorly positioned for a potential downturn in the market. Now, most pundits have been calling for a recession for quite some time. Whether that’s because of an inverted yield curve (that stayed inverted for a very long time) or weakening consumer spending activity, it’s clear the so-called “soft landing” narrative has won out. For now, a recession isn’t on most economists’ or analysts’ radar screens. That worries me, because when the economy is eventually hit with a crisis (business cycles happen), this is a stock that could get hammered.
I do think Bombardier’s current multiple certainly prices in a great deal of this risk, and it’s also worth noting this is a company that’s produced outsized profits during this cycle. However, with a still-indebted balance sheet and concerns around future growth expectations likely to pick up as economic headwinds pick up over time, this is a stock I’d steer clear of right now.
Bottom line
I think there are a plethora of top-quality growth stocks to be had in this market, each with their own unique secular tailwinds that should support their businesses over time. In that context, I don’t think it makes much sense to move out on the risk spectrum to gamble on a particular sector continuing to outperform, when too many economic red flags are rearing their head right now.
Accordingly, I think Bombardier is one top Canadian growth stock investors may do better avoiding right now.
