The aerospace sector may seem high risk right now. And certain sections of it certainly are. Entire fleets are parked, and Canadians could be slow in taking back to the skies. But not every vehicle in the sky is carrying passengers. Here’s why two top Canadian aerospace names are vastly different in terms of risk.
Why this commercial airline stock is bouncing
Air Canada (TSX:AC) recently announced its new foray into the cargo-only space. This was an interesting move that saw the troubled airline potentially stealing some reflected glory from Cargojet (TSX:CJT). Sadly, it was soon followed by news that Air Canada would be dropping some aspects of its protective social-distancing measures.
In reverting to United Nations and International International Air Transport Association (IATA) standards, Air Canada is still complying with recognized guidelines. However, the final judge of the wisdom of rolling back social-distancing measures won’t be the UN or the IATA. It will be history.
Businesses like Air Canada, WestJet, and American Airlines are angling to get profits back on course with the minimum of caution. These airlines are looking at the near term and trying to increase profitability as quickly as possible. But this is a gamble. Running flights at full capacity before a vaccine is available might be admissible, but it might not be sustainable.
Air Canada had, until recently, looked like a contrarian long-shot rich with multi-year upside potential. And, in fairness, it still could be — even more so, in theory, given its pledge to get back to business as usual. But this week, the proverbial mask has slipped. At this stage, investors dubious about reopening without a vaccine might want to look elsewhere.
The defensive logistics play (that’s also an aerospace stock)
Let’s take another look at Cargojet, whose cargo-only model Air Canada is trying to muscle in on. Cargojet has been proving popular with momentum investors thanks to its standing as an essential part of the vital supply chain infrastructure.
Cargojet supports quarantine efforts, making for a rare defensive aerospace pick. It does this by being a vital part of the supply chain. Cargojet ships medical supplies and other time-sensitive materials that are essential to social wellbeing and the fight against the pandemic.
With the capacity to carry 1.3 million pounds of cargo per business night, Cargojet is an extreme wide-moat pick. Up 86.8% since this time last year, Cargojet was already the stronger pick of the two stocks. Compare and contrast with Air Canada’s 55.9% share price plunge during the same period.
It’s easy to see Cargojet’s steep capital gains appreciation in the last three months as a sign that the market is rewarding pandemic-ready stocks. However, as market observers will know, momentum is not necessarily logical in the current market. In short, while Cargojet is popular with growth investors right now, it could soar to new heights once low-risk investors see it for the defensive play it really is.
Growth stocks aren’t known for being cheap. But there are more than a few names on the TSX that match value with strong, long-term potential. We’ve rounded up a few of them for you...
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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.
Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CARGOJET INC.