Midway through March, Air Canada (TSX:AC) had been looking at 50% losses for the year to date. Shareholders were in despair. Contrarians were eyeing the long-term opportunities, meanwhile, and value investors were weighing performance with quality.
Today, almost two months on, the story is much the same. The turbulence hasn’t gone away, though, and the virus crisis continues to weigh on the markets.
Investors should focus on rebound potential
So what makes Air Canada such a strong buy for the long-term contrarian investor? The answer lies in the upside potential. Imagine an over 50% pullback in a major sector in a normal market. The potential to double one’s money in a proven sector would be irresistible.
Now factor in the potential for a sustained market rally – a believable one, built on a post-vaccine return to normal life and resumed operations across all sectors.
Now single out one name, one major operator, in an essential industry. Air Canada is arguably the strongest play for air travel exposure on the TSX. It’s not perfect, but few aerospace businesses are.
But for a long-term recovery, Air Canada is a fairly wide-moat play for market dominance in a recovering world. The would-be billionaire could certainly find worse places to stash their cash, and the upside potential is huge.
Just look at the last month of trading. Air Canada had rallied by 33% in the past four weeks before its predictably grim first-quarter report. This is quite the rebound. A 33% recovery was way beyond the predictions of the markets as they stood at the start of April.
Imagine the potential relief rally after the virus has been defeated and life returns to normal. The share prices of major airlines are likely to rocket once their planes are back in the sky.
After all, Air Canada is capable of pulling down $19 billion in a good year. The airline serves 200 destinations in normal operating conditions. A standard year would see around 1,500 daily flights, with 50 million passengers accounted for. Demand is a fraction of that at present. The short-term risk is palpable. But the potential for a long-term recovery in this wide-moat name is equally strong.
Air Canada is potentially less at risk than a parts manufacturer, for instance, and could come back stronger. Far worse would be an investment in plane manufacturing, which has suffered one catastrophe after another.
When choosing between a manufacturer and a service provider, it therefore seems the better choice right now would be the latter. After all, the fewer moving parts involved when the economy reopens, the better.
The bottom line
The last thing the aerospace industry needs right now is big orders of brand new planes. That’s why there is only one strong play in this space: the airlines themselves. Investors should consider going long on the nation’s flag-carrier and avoid risky manufacturers.
People will take to the skies in droves once the virus has eased. But before then, value opportunities abound – and could see massive share price appreciation in the long run.
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 Victoria Hetherington has no position in any of the stocks mentioned.