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Why Air Canada (TSX:AC) Stock Is Up 20% in the Last Week

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Shares of airline giant Air Canada (TSX:AC) are trading 22% higher this week at the time of writing. The stock has now gained close to 100% in market value after bottoming out in March 2020. We know that the COVID-19 pandemic has completely decimated airline stocks as international borders are shut and travel is at a standstill.

But as economies start to reopen, airline companies are likely to experience a surge in demand. Peer airline stocks south of the border have also seen a rise in market value in the last week. Shares of Delta Air Lines, American Airlines, and United Airlines Holdings also gained 30%, 60%, and 44%, respectively in the last week.

So, can Air Canada stock climb higher in the second half of 2020? Or will it be range bound and volatile given the uncertainty and capital-intensive nature of this business?

Is Air Canada stock a value trap?

Air Canada stock was one of the top-performing stocks on the TSX in the last decade. It increased investor wealth by almost 4,000% between January 2010 and January 2020. Its December quarter was a record one in terms of revenue.

However, Air Canada is a high beta stock, and while it crushes market returns in a bull run, it significantly underperforms equity indexes in an economic slowdown.

It took Air Canada stock close to six years to rise from $9.5 in mid-2014 to its record high of $52.71 in early 2020. However, the COVID-19 led sell-off saw the stock price plummet to a multi-year low of $9.26 within two months.

Investors who have avoided this stock in 2020 can take solace from the fact that Warren Buffett recently dumped airline companies from his portfolio. Buffett further announced that he has exited the airline industry for good, as there is no reason to own an airline stock in the next three years.

Several analysts also believe that it will take two years for air traffic to reach pre-coronavirus levels. The airline sector is one of the worst-performing industries in an economic downturn. People are likely to delay travel plans as unemployment rates move higher and consumer spending is significantly impacted.

Is Air Canada stock the ultimate contrarian buy?

Air Canada shares have been pummelled recently. Despite the recent uptick in stock prices, it’s still trading 63% below record highs. However, investors need to know that Air Canada is systemically important to Canada and creates plenty of employment opportunities. It was bailed out by the Government of Canada after the financial crisis due to this very reason.

If the airline giant can avoid bankruptcy in 2020, its stock is likely to make a strong comeback in the upcoming decade. It remains an attractive pick for Canadians looking to invest in beaten-down stocks.

The Foolish takeaway

Air Canada could see a 90% decline in capacity during the second quarter, which will also lead to a billion-dollar net loss in Q2 due to high fixed costs. Air Canada is planning to raise $500.5 million in equity capital and US$650 million in convertible senior secured notes to increase liquidity.

These steps will help the firm weather the COVID-19 storm. It has a huge market presence but there is still a lot of uncertainty surrounding global economies right now.

However, for investors with a large risk appetite, investing in Air Canada stock might result in huge upside potential as well.

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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.

The Motley Fool recommends Delta Air Lines. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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