This Small-Cap Stock Is Like Air Canada (TSX:AC) Without the Risk!

Air Canada (TSX:AC) stock could be a good dip buy, but it’s very risky.

| More on:
Plane on runway, aircraft

Image source: Getty Images.

In the current stock market rebound, many investors are showing interest in Air Canada (TSX:AC) stock. Trading at a rock-bottom price-to-earnings multiple, it’s cheaper than it has been in years. By traditional metrics, it’s a great value play.

However, AC faces a number of risk factors that could get investors in trouble. It’s showing tell-tale signs of cash flow problems and is facing the possibility of having its flights cancelled for a prolonged period. If the company remains non-operational for long, it could be looking at another bankruptcy. In that case, it could be bailed out, but current shareholders could see their equity diluted.

Nevertheless, the broad thesis for investing in airlines right now is sound. With “ultra-cheap” valuations, many of them are absolute bargains. If an investor could pick the “safest” airline stocks — those not at risk of insolvency — they’d stand to make a lot of money. As far as passenger airlines go, that would be a hard call to make. All of them are capital-intensive businesses that can’t go through months of being shut down without serious financial problems. However, there are some cargo airlines that could actually be good buys. In this article, I’ll explore one of the best.

CargoJet

CargoJet (TSX:CJT) is a small Canadian cargo airline. It’s based in Ontario and ships goods around Canada and, to a lesser extent, internationally. Its specialty is overnight shipping — mainly small deliveries for individual buyers. This focus on small packages means that the company ships a lot of e-commerce orders. As a result, it’s actually doing better in the COVID-19 era than it was before. E-commerce sales are exploding right now thanks to business closures. CargoJet benefits from this trend, as it does a lot of shipping for companies like Amazon.

Why it’s safer than Air Canada

CargoJet is a safer bet than Air Canada, because it’s able to operate normally in the current environment. Currently, Air Canada has 90% of its flights shut down due to travel restrictions. It’s not clear that they will come back immediately when lockdowns are lifted. A big part of why many routes were cancelled early on was because passengers voluntarily stopped flying. If people are still concerned about COVID-19 after the economy formally re-opens, then air travel will remain low. In this situation, passenger airlines like AC would lose money.

It’s just the opposite with CargoJet. As a cargo airline that ships e-commerce products, it’s thriving right now rather than suffering. The biggest risk factor facing the company is a drop-off in business after COVID-19 lockdowns end. That would lead to a revenue decline, but it wouldn’t put the company in financial dire straits. So, CJT just doesn’t have the big risk factors that AC has right now — bankruptcy, dilutive bailouts, etc.

On the flip side, CJT doesn’t have the upside that AC has in a best-case scenario. AC is practically being given away for free now, so it could bounce back dramatically if it can survive COVID with its finances intact. However, it’s not certain that that will happen, so the stock remains very risky. Overall, CJT is the “safer” bet.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Andrew Button has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and CARGOJET INC and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon.

More on Coronavirus

little girl in pilot costume playing and dreaming of flying over the sky
Coronavirus

Air Canada Stock: How High Could it go?

AC stock is up 29% in the last six months alone, so should we expect more great things? Or is…

Read more »

eat food
Coronavirus

Goodfood Stock Doubles Within Days: Time to Buy?

Goodfood (TSX:FOOD) stock has surged 125% in the last few weeks, so what happened, and should investors hop back on…

Read more »

stock data
Tech Stocks

If I Could Only Buy 1 Stock Before 2023, This Would Be It

This stock is the one company that really doesn't deserve its ultra-low share price, so I'll definitely pick it up…

Read more »

Aircraft Mechanic checking jet engine of the airplane
Coronavirus

Air Canada Stock Fell 5% in November: Is it a Buy Today?

Air Canada (TSX:AC) stock saw remarkable improvements during its last quarter but still dropped 5% with more recession hints. So,…

Read more »

Airport and plane
Coronavirus

Is Air Canada Stock a Buy Today?

Airlines are on the rebound. Does Air Canada stock deserve to be on your buy list?

Read more »

A patient takes medicine out of a daily pill box.
Coronavirus

Retirees: 2 Healthcare Stocks That Could Help Set You up for Life

Healthcare stocks offer an incredible opportunity for growth for those investors who look to the right stocks, such as these…

Read more »

sad concerned deep in thought
Coronavirus

Here’s Why I Just Bought WELL Health Stock

WELL Health stock (TSX:WELL) may be a healthcare stock and a tech stock, but don't let that keep you from…

Read more »

healthcare pharma
Coronavirus

WELL Stock: The Safe Stock Investors Can’t Afford to Ignore

WELL stock (TSX:WELL) fell 68% from peak to trough, and yet there's no good reason as to why. So now…

Read more »