Are Turbulent Times Ahead for Air Canada?

Air Canada (TSX:AC)(TSX:AC.B) has soared into the stratosphere of late. Could the ride start getting rocky for shareholders? Or is it time to buy more after its latest earnings release?

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Since my initial recommendation of Air Canada (TSX:AC)(TSX:AC.B) just a few months ago, shares have soared approximately 65%. Those are some pretty ridiculous returns in a short span, but after the recent spike, shares are starting to look dangerously bubbly. Is Air Canada still a great buy today? Or could turbulent times be on the horizon?

Even after an impressive run these past few months, shares of Air Canada still trade at a minuscule 7.17 price-to-earnings multiple, which is still ridiculously cheap — too good to be true, in fact. In my previous pieces, I made it clear that the company’s rock-bottom price-to-earnings multiple was not indicative of a value trap and that it was an incredible buying opportunity for investors who wanted to ride a cyclical upswing.

Normally after such an impressive rally, I’d recommend avoiding the company and say that you missed out, but in the case of Air Canada, I don’t think it’s too late for investors who missed out on impressive gains this year. All the easy profits have been made, but that doesn’t mean there’s limited upside; in fact, over the medium term, I believe you can still do very well by owning shares with a cost basis in the $20s.

Strong Q2 could send Air Canada to higher altitudes

In the second quarter, Air Canada reported an operating income of $281 million — up from $277 million during the same quarter last year. Adjusted net income came in at $215 million, or $0.78 per share, which was considerably higher than the $203 million, or $0.72 per share, delivered during the same quarter last year.

Air Canada is riding a ridiculous amount of momentum, and I don’t think it’s going to be stopped anytime soon. But eventually, Air Canada will come in for a landing, and that’s a major reason why I’d recommend not getting too attached to your shares.

Buy-and-hold-forever investors: beware

Airlines are ridiculously cyclical, and you could surrender all of your gains in a hurry if your intention is to buy AC and hold it forever. That’s a major reason why Warren Buffett wasn’t a big fan of the airlines — that is, until they simply became too cheap to pass on.

Those who refuse to take their profits off the table will be in for a turbulent ride sometime over the next few years. But until then, Air Canada is a great medium-term trade, and if you’re comfortable betting on a cyclical name on its upswing, then you better get on board Air Canada before the next flight takes off.

Stay smart. Stay hungry. Stay Foolish.

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 Joey Frenette has no position in any stocks mentioned.

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