The second wave of the pandemic is hitting several countries. Some European countries are seeing the number of new cases rising at an even higher rate than they did in the first wave (partly due to more efficient testing). While the situation is not as dire in Canada, the number of new cases is steadily growing. While that has set many people at the edge of panic, the true fear would come if the fatality rate starts to follow suit.
A second wave of the pandemic would be destructive for a lot of businesses, but it would be worse for Air Canada (TSX:AC). The company introduced an unlimited flight pass with the hopes of enticing domestic travel, but with the fear of virus rekindling, few people would be interested in that.
Air Canada stock
The company is trading at $15.5 per share at the time of writing this. The number is dangerously close to $12.15 per share price at the peak of the market crash. And if we look at the 14-day RSI, the momentum is moving toward oversold territory. This might mean that investors who bought the company as the ultimate recovery stock are getting cold feet.
At this price, the stock would only need to reach $31 per share to double up investors’ money, which is not a very high mark considering what the company was trading at before the crash. And if by some miracle, the stock manages to jump to its pre-pandemic highs, investors who buy now would triple their investment.
But that hopeful prospect is tinged with the fear that the chase of 100% gains might also return in a 100% loss if the company goes bankrupt. While the chances of the company going under are still low, they might get higher based on the intensity and time-spread of the second wave. The company is burning through millions of dollars every day, and the current liquidity can’t last forever.
Whether you like the stock or not, there’s one undeniable fact: The company has been very resilient. The company raised liquidity and cut costs quite aggressively to become light enough and gather adequate resources to survive despite non-existent revenues. And while it has asked for government aid several times, the company is currently managing on its own.
Though the resilience is commendable, it might not be tangible enough to see the company through another such year. If a vaccine doesn’t come on time, subsequent waves keep hitting the country, and the demand (both domestic and international) stays low, the company might burn through whatever it has scrounged up.
The situation seems bleak. Even if you are buying the stock, hoping it would recover, the timeline might not be what you are hoping for. And even if the company’s revenues do recover, it would take a while for investor sentiment to reset to pre-pandemic levels fully. But with high risk, you might also see the high reward. So if you believe in the company’s recovery, you might want to consider it for 100% gains.
Speaking of Air Canada...
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Fool contributor Adam Othman has no position in any of the stocks mentioned.