Air Canada (TSX:AC) has been one of the most discussed stocks of 2020 and 2021 (so far). The company came quite close to bankruptcy, but it managed to pull through that — without government intervention, that is. And now that the long-sought aid is finally coming, the stock is not responding well. The federal government is now one of the largest stakeholders in the airline, and this major dilution of stock isn’t something investors are very keen on.
The stock was already diluted in 2020, when the airline offered both Class A and Class B voting shares back in May 2020 in order to raise capital. It might have been one of the reasons why the stock plunged, but it wasn’t the only one.
Air Canada stock plunged
Air Canada stock reached quite close to $30 in March 2021, but the airline couldn’t stay afloat at that level. It plunged a bit before recovering. But the 16% drop in Air Canada stock during April is one of the sharpest ones yet. And even though the stock has begun to recover, it’s still a long way from its recent peak, let alone its pre-pandemic heights.
But we are not even halfway into the year, and the chances that the stock might reach $50 are still ripe. If you believe that’s the valuation Air Canada will end the year on, then buying now would give you a chance to double your money in less than a year. But if you think that the government’s aid coupled with the resurgence of the virus might keep the stock floating close to the runway, you may consider waiting for a better time to buy.
The long-term prospects of Air Canada are still bright. The company is already going through an organic recovery, and a significant financial boost that the government aid has provided will help the company meet its most immediate financial obligations (like refunds) without taking on more debt or diluting shares more than it already has.
It will most likely take at least a couple of years before the operational activity reverts to its original state and the company starts generating enough operating income to support its expenses. The management’s projection might no longer be as accurate, seeing how the third wave impacts the recovery (both economic and air travel).
But if there isn’t a fourth wave, Air Canada might be on track to its eventual recovery, and the stock might not dip below $20 anytime soon.
Air Canada might prove to be a great recovery stock if you are willing to hold on to it for a long time. Whether it will reach its pre-crash heights of $50 this year or in 2022 remains to be seen, but there is a strong probability that’s where the stock is headed. But there is no surety.
Speaking of Air Canada’s recovery from its monthly decline...
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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 Adam Othman has no position in any of the stocks mentioned.