Air Canada (TSX:AC) Is up Almost 100%: Is the Stock a Buy?

Air Canada (TSX:AC) has soared nearly 100% from March lows. Yet it still has significant risks and headwinds. Is the stock an investment or speculation?

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Air Canada (TSX:AC) stock has had a momentous run up since hitting lows in March. Since March 23, it is up 84%. If you’d bought the stock just less than a month ago, on May 14, you would be up 81%. If you’d bought the stock on Friday, you would be up 15%!

These numbers are astounding. Perhaps it is just general summer optimism, or the markets are really signalling a recovery from the pandemic. The fact is, cyclicals, industrials, oil stocks, airlines, and really any TSX stock significantly down is starting to see a rotation of investment dollars. So, is Air Canada stock a good buy?

I have to admit, I have been pretty bearish on Air Canada stock. I didn’t, among many investors, expect such a quick rally from March. There are a few reasons for this.

Headwinds from every direction

The COVID-19 crisis will be an overhang on Air Canada’s earnings and operational performance for the foreseeable future. At the present, it is still only operating between 5% to 10% of its 2019 capacity. Just a few days ago, the company, laid off almost half its work force. It continues to burn a massive amount of cash, and the company is in survival mode at best.

A return to pre-pandemic operations will be a challenge, even if the world recovers sooner than anticipated. Travel habits may be permanently transformed due to the crisis. Certain elements of business travel could be permanently replaced by video conferencing and remote team-working applications. Pre-pandemic business volumes may never return.

It will likely take many years for flight volumes, and especially international volumes, to return to “normal.” With travel restrictions and quarantine measures in place, international travel is just not practical yet.

I think many people will remain leery of travelling abroad while the health threat of COVID-19 still exists. Air Canada, by its own admission, does not foresee a return to 2019 operational levels for at least three years.

Air Canada stock is soaring from new sentiment

However, on the flip side, sentiment has somehow returned to beaten-down TSX stocks like Air Canada. It just announced an oversubscribed debt and stock financing issuance for $1.6 billion. Interestingly, just prior to the financing, Moody’s downgraded Air Canada’s credit rating to Ba2 based on “the risk of a more challenging downside scenario remains high.” Despite that, institutional and retail investors were still eager to jump on board and back this Canadian stock.

Is Air Canada a buy?

So, is Air Canada’s stock a buy? If Canada’s biggest investors are looking at this name, should you? Considering that sentiment has somewhat returned to the sector, perhaps. You can look at it in two ways.

First, play the stock only as a trade. Trade the stock based on momentum, but be prepared to get out fast. In terms of business fundamentals, Air Canada is concerning at best. There are significant risks (including business failure and insolvency) stacked against the company. At any moment, these risks could come to play in the stock price. While the recent financings help, they don’t solve the pandemic, which is the true root of Air Canada’s problems.

It is really difficult to time markets and stocks over a short-term period, so I don’t recommend this strategy.

Can it get any worse?

The second way is to invest for a very long time (five to 10 years). An investor might look at Air Canada stock and say, “How could it get any worse?” Perhaps, that might be true.

It is Canada’s only publicly traded passenger airline and operates an essential oligopoly. The thing you need to remember is that Air Canada stock could also go to zero. There is big long-term upside, but there is also big short- to mid-term downside. With this stock, only invest today what you can afford to lose tomorrow.

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 Robin Brown has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Moody's.

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