Buy Air Canada (TSX:AC) Stock! It Could Stage a Big Rally Soon

Air Canada (TSX:AC) stock could stage a big rally in the near term after rising by over 10% in May. Here are the key positive factors that might support its rally.

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Air Canada (TSX:AC) stock has been trading on a slightly positive note in June after posting a solid 10.5% gain in May. On a year-to-date basis, the stock has risen by 23.4% compared to a nearly 16% rise in the TSX Composite Index. While the stock hasn’t seen much appreciation this year so far, I expect it to stage a big rally in the coming months.

Here are some key factors that I think would be important in deciding the near-term price trend in Air Canada stock.

Air Canada stock

The COVID-driven shutdowns and restrictions caused a massive drop in travel demand last year and badly hurt the entire travel industry. This led to a massive selloff in the airline stocks, as the trend in their financials suddenly turned negative. Air Canada registered a nearly 70% decline in its 2020 sales, while it burnt more than $4 billion cash for the year. That’s the key reason why its stock shed about 53% of its value last year.

To be fair, I don’t expect a magical recovery in travel demand in the coming months. But the possibility of a sharp recovery in Air Canada’s stock remains open due to the improving demand prospects. A continued surge in global economic activities in the second half of 2021 would encourage more people to travel. In addition, easing travel restrictions amid rapidly rising vaccination rates could help Air Canada recover faster than earlier expected.

Other recent updates

In one of my recent articles, I’d highlighted how Air Canada approved a pandemic mitigation bonus of $20 million last year. The airline awarded nearly $10 million of the total $20 million approved bonus money to a handful of its top executives, including former CEO Calin Rovinescu.

I agree this type of bonus is not very unusual in the corporate world. However, I didn’t expect Air Canada to pay such huge bonuses to its management when it had to fire thousands of employees to save money in the same year.

After facing public criticism, the company, on June 6, announced that its “current executive vice-presidents and the president and CEO of Air Canada have chosen to voluntarily return their 2020 bonuses and share appreciation units.” In my opinion, this move should help the airline regain investors’ confidence. In its statement, Air Canada also reiterated that its leadership team is focused on the airline’s recovery from the pandemic.

Earlier this week, the largest Canadian airline announced that it’s converting several of its “Boeing 767 aircraft into dedicated freighters in order to fully participate in global cargo commercial opportunities.” This step is likely to strengthen Air Canada’s cargo operations further, which is really important at the moment, when travel demand is low.

Should you buy the stock right now?

According to Bay Street analysts’ consensus, Air Canada could report a more than 60% year-over-year increase in its revenue to $845 million in the second quarter. Moreover, its sales growth rate is likely to improve further in the following quarters. All the positive factors discussed in this article point towards a sharp near-term recovery in Air Canada stock. That’s why you may want to add its stock to your portfolio if you don’t already hold it.

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.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

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