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Has Air Canada Stock Bottomed?

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Air Canada stock (TSX:AC) has been under pressure in recent weeks, as the U.K. COVID-19 variant has grown into a major cause for concern for the airlines. Canada’s U.K. travel restrictions extended from a few days to two weeks. Heading into January, there’s a risk that beefed-up travel restrictions could prolong and become wider spread to curb the spread of new, more contagious variants such as the one discovered in the U.K. and South Africa.

Time to buy the dip in Air Canada stock?

Indeed, mutated strains of COVID-19 are a top risk for the reopening trades, such as the air travel stocks, amid continued vaccine rollouts.

In any case, Air Canada looks better-equipped to navigate through this second wave or a potential third wave. The company has done a stellar job of reducing cash burn rates throughout the year. With a decent liquidity position and better-preparedness to deal with a worsening of this pandemic over the near-term, Air Canada definitely seems “better off” than many of its highly-leveraged U.S. peers as we march closer to the post-pandemic world.

Analysts at RBC Capital Markets seem to think so, as they bumped Air Canada stock’s price target to $30 from $23 earlier this month, citing numerous factors that could “support” AC stock in an air travel recovery.

Air Canada stock under pressure — again

Today, Air Canada stock is coming off a brutal retracement from November’s epic rally. The stock plunged 20% from its early December high before recovering a bouncing back modestly to $23 and change. Air Canada stock is down 16% from its early December peak and 55% from its all-time high hit back in January, a time I rang the alarm bell on AC stock, urging investors not to discount potential risks brought forth by the novel coronavirus, which was mostly being shrugged off by Canadian investors at the time.

With the mutated U.K. variant of COVID-19 now in Canada, there are fears that tougher restrictions could in be in the cards. Such restrictions could cause Air Canada’s top line to head for another vicious nosedive. At this juncture, there’s no telling if Canada will follow in the footsteps of the U.K., which may be in for a full lockdown.

The near-term looks bleak, but there is hope this time

Fortunately, mandatory COVID-19 testing measures could prevent excessive damage to Air Canada stock while helping Canada avoid the fate of the U.K., which appears to have lost control of the latest outbreak.

Ottawa recently stated its intent to put forth measures that require airline passengers to get a negative COVID-19 test before landing in the country. At the time of writing, there’s no timeline for when such travel restrictions will come into place.

With rapid-test kits thrown into the equation (for landing air travellers who may require additional tests), I don’t think AC stock is headed for another plunge into the mid-teens. Even with a tough winter to get through, I think Air Canada stock has bottomed in the low $20 levels.

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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