Is Air Canada (TSX:AC) Stock a Buy Amid the COVID-19 Pandemic?

Air Canada (TSX:AC) could have a multitude of upside for contrarian investors if the COVID-19 pandemic ends sooner rather than later.

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Air Canada (TSX:AC) is an intriguing high-upside bet for those looking to ride on the tails of a rebound in the air travel industry. But you’ve got to know what you’re signing up for with a bet on the name amid the coronavirus crisis, so you can minimize the chances that you’ll lose your shirt in your pursuit of outsized gains.

Air Canada: Betting on the elimination of COVID-19

The coronavirus pandemic has decimated travel and leisure stocks. To this day, a majority of commercial airline stocks have yet to participate in the big relief rally the broader markets have been enjoying.

Like it or not, the commercial airlines will probably never reach pre-pandemic levels of normalcy until the advent of an effective coronavirus vaccine or until the virus works its course. The former scenario could lead to very sharp, sudden gains in a potential V-shaped rebound, while the latter is likely to lead to a slow and steady U-shaped recovery that could span many years.

The keyword here is effective, as several pundits have noted the possibility that a vaccine may not be as effective at eliminating the coronavirus as most think.

A complete eradication of the virus is unlikely to happen in a timely manner, but an elimination (where the virus is mostly wiped out in various geographies) is possible if a vaccine that lands is effective. Given the possibility that a less-than-effective vaccine may not be suitable for certain populations based on factors such as age, herd immunity (the ultimate goal for airline stock investors) across various geographies is no guarantee with the first vaccine that lands.

Understanding the risk/reward tradeoff with Air Canada amid the COVID-19 pandemic

With limited visibility into when this horrific COVID-19 pandemic will conclude and what the endgame will entail, there’s no telling when it’ll be safe to hit the skies once again with Air Canada stock.

A bull-case scenario could result in a multitude of upside, but if we’re without an effective vaccine for years and the virus can’t be contained via other means, few things, I believe, will stop Air Canada stock from facing excessive turbulence en route to the single digits.

Air Canada’s management team has done a terrific job of increasing its ability to survive this crisis. They’re exceptional stewards that get top marks when it comes to their crisis-response efforts. The company has been raising substantial amounts of liquidity, reducing its cash burn rates, and cutting capacity to maintain a higher degree of financial flexibility.

But at the end of the day, the trajectory of the stock depends on exogenous events relating to the coronavirus. And until it’s safe to not socially distance, Air Canada stock will likely struggle to sustain a rally past the $20 mark.

That said, I think it’s a bad idea to bet against the advent of an effective vaccine. The entire planet is focused on discovering one, and with distribution infrastructure already in place for certain vaccine developers, all it will take is one positive news event that could send airline stocks skyrocketing into the stratosphere.

Foolish takeaway

Heck, count me as not surprised if Air Canada surges over 100% in a single trading session on news of a real effective COVID-19 vaccine breakthrough. With the stock at $17 and change, I’d be far more inclined to buy the stock than short it, as the risk/reward tradeoff is in favour of the bulls, despite the speculative nature of the stock. If you’ve got a strong stomach and a long-term horizon, Air Canada looks like a strong buy in my books.

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 Joey Frenette has no position in any of the stocks mentioned.

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