Every once in a while, Mr. Market offers a deal that’s too good for TFSA investors to pass up, such as Air Canada (TSX:AC) stock at today’s depressed levels. The insidious coronavirus (COVID-19) caused shares of the top Canadian airline to get cut in half twice, with shares falling over 75% from the February peak to the March trough.
Air Canada stock: Uninvestable? A speculative gamble? Or a worthy value investment for TFSA investors?
The airlines are at ground zero of the coronavirus-induced lockdown, and the uncertainties couldn’t be greater. However, I think that many TFSA investors have become too nearsighted with Air Canada stock. More folks seemingly focused on the firm’s risk of bankruptcy (which I view as highly unlikely) rather than how high the airline will fly in 2021 and beyond, once the coronavirus pandemic finally falls in the rear-view mirror.
Sure, the airline is due to suffer an unprecedented decline to its top- and bottom-line numbers for the coming quarters, but that’s probably already baked into the stock and then some. And while some may fear that Air Canada won’t survive the coronavirus crisis, I’m in the viewpoint that the company as “too vital to fail.”
Even under the assumption that the pandemic drags on through 2020, with a potential spillover into 2021, Air Canada stock is still so ridiculously cheap that it’s priced to outperform, even if the re-opening of the global economy were to take longer than expected.
In any case, Air Canada has made all the right moves to navigate the rough waters that lie ahead. Capacity cuts, minimal debt coming due amid the pandemic, and a decent liquidity position make Air Canada stock less of a speculative gamble relative to its U.S.-based counterparts and more of a deep-value investment that’s a top pick for TFSA investors.
Yes, the stock is risky, and off-the-charts volatility will likely continue to be the theme for the troubled airline stocks. Still, the potential rewards over the medium term have the potential to be profound, given the excessive pessimism surrounding the airlines.
If Air Canada and the airlines recover within just a few years, AC is a pound-the-table buy for TFSA investors
Boeing CEO David Calhoun believes that air travel could take two to three years to recover. For a long-term investor with a time horizon that should be at least five years, a two- to three-year recovery is nothing in the grander scheme of things. If you think air travel will be back to normal within three years, Air Canada’s current valuation makes absolutely no sense, with shares trading at a mere 1.1 times book.
Fortunately, for Air Canada shareholders looking to outperform over the next year or two, I think AC stock has been so battered that it will likely recover a tonne of ground, possibly doubling, well before there’s meaningful evidence of an airline industry rebound. By the time the airline industry shows signs of significant recovery, it’ll be too late to pick up shares of Air Canada at around $20. If anything, the price to admission will likely be closer to $40 by then.
If you’re looking for a potential market beater for your TFSA, you’ve got to buy AC now, while pessimism is high, and not when everybody else believes it’s safe to get jump aboard the stock; by then, you’ll miss the take-off.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette owns shares of Boeing.