Shares of Air Canada (TSX:AC) and Cineplex (TSX:CGX) were on the retreat this week, with AC and CGX stocks plunging 11% and 6%, respectively, from their weekly highs, as growth and frothy reopening plays took a chance to cool off. While I have no idea whether the pain is a near-term buying opportunity or the start just the start of something more severe, I think contrarians looking to get into either name should carefully evaluate the risk/reward at this most critical of market crossroads.
Meet the TSX’s top reopening stocks!
Undoubtedly, both names are some of the TSX’s most popular economic reopening plays. But just because the COVID-19 pandemic’s end is in sight does not mean either company will be in for an abrupt return to their 2019 highs.
Air Canada was flying high before the COVID-19 pandemic sent the airline industry into a fight for survival. Various U.S. airline stocks have already fully recovered from the 2020 stock market crash, yet Air Canada remains off around 46% from its early 2020 heights. Could AC stock be positioned to follow in the footsteps of its U.S. peers with a few months’ lag? Or are there fundamental differences that will keep Air Canada stock depressed, as other airlines soar?
Air Canada is a different flavour than its peers south of the border. First, it’s a Canadian airline. In Canada, the vaccine rollout hasn’t gone as quickly or as smoothly as in the States. That means restrictions and all the sort could linger on for a few months longer than U.S. airlines that are already seeing some relief.
Second, Air Canada is a huge chunk of pre-pandemic revenues derived from international flights. I think international restrictions could act as a serious overhang for AC stock for many quarters after this pandemic ends. With more transmissible COVID-19 variants of concern popping up from left, right, and centre, it’s clear that the federal government must remain vigilant to avoid future waves of COVID-19. Indeed, international travel will be far slower to recover than domestic travel, which warrants a discount on Air Canada shares versus its more domestically focused peers.
Third, Air Canada is one of few major national carriers. And with that, I suspect the federal government is willing to provide ample relief or bailouts should the waters get rougher between now the end of the pandemic. Air Canada has a decent balance sheet and a critical lifeline that leads me to believe that Air Canada is too big and “vital” to fail, even if worse comes to worst.
Cineplex is a movie theatre kingpin that cannot catch a break! There are too many headwinds to count, and the stock and its balance sheet look toxic. It’s hard to imagine a world where we’ll crowd into movie theatres again, especially given the rise of “premier access” from big-league streamers like Walt Disney’s Disney+ platform.
Despite the pressures, I don’t think Cineplex or the movie theatre concept will die at the hands of COVID-19. Rather, I think the future of cinema is both in theatre and at home. I believe consumers will have the option to catch a flick at the local Cineplex or order premier access on their favourite video streamer. With pent-up demand to go out and catch a flick in the company of friends, I think Cineplex will bounce back quickly after we reach herd immunity. And I think streamers and cinemas will reach an equilibrium where they can both prosper.
For now, I wouldn’t bet against Cineplex. Like Air Canada, it’s too “vital” to fail. I think Cineplex will be a compelling takeover target, but I wouldn’t recommend you play acquisition roulette on the name, as the stock is still up big from its lows.
Better buy: Cineplex or Air Canada stock?
Both stocks are reliant on a timely end of this pandemic. And I’m still unsure as to what the post-pandemic world has in store for the most at-risk plays that’ll be first to shutter should lockdowns return. If I had to pick one, I’d go with Air Canada stock, because I do not see the government letting it collapse.
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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 Joey Frenette owns shares of Walt Disney. David Gardner owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends CINEPLEX INC.