Up until three months ago, Air Canada (TSX:AC)(TSX:AC.B) was considered one of the best growth stocks trading on the TSX. Now, the company appears to be losing investor confidence faster than its actual customers. While Air Canada isn’t the only airline in the world that’s at the spear-point of the pandemic, as Canada’s premier airline, more eyes are upon it than other airlines.
Some investors might even be looking at Air Canada as a “sector-failure” gauge. If Air Canada fails, many smaller airlines might not stand a chance. And it’s not just speculation.
A report published by CAPA (Centre for Aviation) claimed that most global airlines would go bankrupt by May if the pandemic continues to rage on. That’s also contingent on governments not bailing out their airlines in time.
Should you sell?
A very strong argument for selling might come from Warren Buffett’s recent move with the airlines. His company dumped its stake in two U.S. airlines. For a company that sticks with the notion of long-term holding of securities, this move is very out of character.
Does that mean things will get worse for the airlines? While it’s certainly possible, it might not be reason enough to sell Air Canada, at least, not yet.
While the stock has climbed up from its all-time low value, it’s still about 64% down from its high yearly value. It’s quite a substantial move up from the slump. The company also took the tough decision of laying off half its staff.
But thankfully, the company hired most of the employees back after negotiating a deal with the federal government about its eligibility to become part of the government’s COVID-19 aid package.
If the government is willing to fund the salaries of Air Canada’s 16,000 off-duty employees, the chances are that it won’t let its flagship airline down.
Should you buy it?
Becoming part of the air package is a win for Air Canada. But that still doesn’t remove the uncertainty surrounding the market. On the one hand, the company is trading at painfully low prices. If you think it stands a decent chance of recovery and regaining its former growth pace, the investment might have the potential to make you a millionaire.
But on the other hand, you can’t be sure how long the pandemic will continue. If it goes on any longer, then the financial crises it will create might become another force against the airline business. The government can save companies only so many times, especially when its resources are engaged elsewhere.
If you’re willing to bet on the resilience of the broader market and the company itself, you should buy it. But you don’t need to follow the win-big lose-big strategy here.
Even if you are planning to buy, only invest as much as you can tolerate losing. There is no reason to bet your safety reserves on a bet that might pay-off big.
Air Canada is in better shape today than it has been in the past. When the company restructured after bankruptcy, it truly emerged as a completely changed business.
But no matter how strong a business is, there is a limit to how long it can stand its ground against external agents that are decimating the broader market. But if it does, it may reward its investors more richly than they ever imagined.
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.