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This Airline Has a Better Risk/Reward Tradeoff Than Air Canada (TSX:AC)

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As the stocks look to bounce back after one of the worst market meltdowns since the Financial Crisis, many investors are looking to the airline stocks for a chance to make quick gains in a V-shaped market recovery. Given the TSX Index has already bounced over 26% off its late-March bottom, it seems as though the market bottom is already in, and it’s “safe” to get back in the equity market waters.

The airlines took a massive beating amid the coronavirus crisis. Travel restrictions and the fear of catching COVID-19 will send top-line numbers of the commercial airlines nosediving for the coming quarter. But this dire news is already baked into the stock, right?

Although it’s likely that a majority of the damage to airline stocks is already done (Air Canada (TSX:AC)(TSX:AC.B) stock has already fallen over 75% from peak to trough), investors need to realize that there are still a tonne of uncertainties that could stand to derail the heroic airline investment thesis at this juncture. Just because a name like Air Canada has halved twice doesn’t mean it can’t happen again in a worst-case scenario.

The commercial airlines haven’t been cleared for take-off yet

Many pundits believe that businesses will re-open in May (or June), but for the commercial airlines, tickets will probably be a “tough sell” well after the infection curve has “flattened.” As long as there’s some risk of contracting the deadly coronavirus, many will be reluctant to travel, whether it be for business or pleasure.

If the coronavirus ends up being seasonal in nature and a vaccine is developed later rather than sooner, even the more liquid airlines like Air Canada could be headed for another tailspin, potentially to single-digit territory.

Sure, Air Canada stock has massive upside potential for those willing to bear the equally huge risks, but I’d argue that the average risk-averse investor would be better off not playing the outcome of the coronavirus over the near term. The downside risk is just too great for those allergic to off-the-charts volatility.

Cargo airlines are a less-risky bet than commercial airlines

Consider shares of a cargo airline like CargoJet (TSX:CJT), which will be able to operate in a somewhat routine fashion, even if the coronavirus pandemic drags on for longer than most are expecting.

CargoJet doesn’t transport people; it transports goods.

During a pandemic, when brick-and-mortar retail stores are being shuttered and everybody is encouraged to stay at home, the demand for overnight shipping services will remain stable. And should a coronavirus resurgence end up happening at some point over the next few months, CargoJet won’t see its revenues fall off a cliff like with the commercial airlines.

Shares of CargoJet crashed 39% from peak to trough amid the coronavirus crash but were quick to bounce back, as investors recognized that CargoJet was actually a relatively COVID-19-proof investment, unlike the commercial airlines.

Foolish takeaway

At the time of writing, CargoJet stock is off just 5% from its all-time high.

Although the name is pretty expensive at 68 times next year’s expected earnings, I’d argue it’s far better to pay up for a resilient name that isn’t dependent on the outcome of an exogenous event for its survival. CargoJet is riding on a secular e-commerce tailwind and will continue to fly high, as its commercial peers grind to a halt.

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 of the stocks mentioned. The Motley Fool owns shares of and recommends CARGOJET INC.

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