If you’re an investor looking to make timely moves for market-beating results over the next year or two, it’s essential that you buy a stock that has near-term catalysts that could meaningfully propel year-ahead results. Such catalysts will elevate the sentiment of the general public when the proof finally becomes evident in the pudding.
One must be cautious when hunting for companies with near- to medium-term catalysts though; a lot of the time, such catalysts are already baked in to the share price. So, as always, valuation is key to obtaining the best bang for your buck, especially if you’re looking for above-average results over the near term.
When it comes to overlooked catalysts, I think the emergence of ultra-low-cost carriers (ULCC) in the Canadian airline industry is not getting the attention it deserves from investors. Most of the attention has been surrounding rising fuel prices and the highly cyclical nature of the industry, which could result in deep investor losses over a very short duration of time.
I understand a high degree of cyclicality would make any investor uneasy, especially since most pundits would agree that we’re entering the final stages of the current bull market, but given the airline’s dirt-cheap valuations, a lack of evidence of a slowdown, and a meaningful long-term catalyst in ULCC, it appears that Canadian airline stocks are all bargains with a huge margin of safety at current prices.
Moreover, the rise of ULCC, I believe, is being downplayed by many analysts and will continue to be unappreciated until the results finally make their way into a quarterly report. Not only will a lower-cost ULCC business allow the airlines to better weather harsh economic conditions, but I think the ~40% cheaper domestic flights will experience a surge in demand, especially if the savings don’t result in a drastic decline in customer service.
WestJet Airlines Ltd.’s (TSX:WJA) ULCC Swoop is slated to take the Canadian skies this summer, and although many competitors will be fighting for budget flyers, WestJet appears to have the ability to scale up at a much faster rate than the competition in order to meet what I believe will be high demand for cheap seats over the medium term.
The ULCC has the potential to provide a meaningful boost to the top and bottom line over the near term, and over the long term, I suspect the ULCC arm will grow to contribute a larger portion of overall revenues, which will allow WestJet to become more recession-proof come the next downturn.
Furthermore, concerns over rising fuel prices are unwarranted when it comes to WestJet. Unlike many other airlines, the company has a natural hedge against rising oil prices in its exposure to the Albertan market, which has since been nothing but a drag on WestJet’s ROIC.
At the time of writing, WestJet trades at a 10.4 forward P/E, a 1.2 P/B, a 0.6 P/S, and a 2.6 P/CF, all of which are substantially lower than the company’s five-year historical average multiples of 11.1, 1.7, 0.8, and 3.9, respectively.
The stock is really cheap, and given that Swoop is poised for take-off, I think the stock could realistically jet to the mid $20 levels by year-end.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.