As investors, it’s essential to build a portfolio of stocks that you plan to own for the long haul. However, it’s just as important to keep up to date with the market and to look for any new opportunities that may present themselves. And in the last few years, two of the hottest Canadian stocks that investors have been following are Air Canada (TSX: AC) and Dollarama (TSX: DOL).
Air Canada specifically has been a popular stock because of how cheap it became after the pandemic selloff and the fact that it still hasn’t recovered fully. Therefore, many investors have been following Air Canada stock waiting for the perfect opportunity to buy ahead of an anticipated recovery in its stock price.
However, Dollarama has been an incredible growth stock for years now, but it’s become even more popular over the last year and a half as one of the few Canadian stocks that can actually benefit from inflation.
Therefore, with the airline industry recovering rapidly but also with an uncertain economic environment and a potential recession on the horizon, many investors are wondering what’s the better long-term buy: Dollarama stock or Air Canada?
Air Canada stock
Before the pandemic hit, Air Canada stock was trading at more than $50 a share. It’s not surprising at all why it’s been so popular in recent years, trading under $15 a share at some points and never recovering past $30 a share in the more than three years since the initial selloff.
Plus, the stock’s operations and the airline industry in general have seen an unbelievable recovery over the last year, which is helping Air Canada to turn its business around.
In 2022, we saw Air Canada’s revenue recover to roughly 87% of what it was doing prior to the pandemic. And in the last 12 months, we’ve seen Air Canada’s share price gain over 40% as a result.
However, while there is no denying that Air Canada has recovery potential, and the airline industry is widely expected to continue to grow over the coming years and decades, Air Canada faces stiff competition and will undoubtedly face more headwinds, especially during periods when economic growth is seeing a slowdown.
Therefore, while it offers recovery potential over the near term, in terms of long-term growth potential, Dollarama stock could have a significant edge.
Dollarama stock
In today’s market, although Dollarama trades at a premium valuation and Air Canada stock is undervalued, as a long-term investment, the fact that Dollarama is a defensive stock that can consistently grow its business at an incredible pace makes it a much better investment.
When you buy a stock like Air Canada stock that’s undervalued, the potential gains you can make are limited to how much it can recover. Then from there, it’s all about how well Air Canada can continue to operate and grow its operations.
With a stock like Dollarama, though, you have the potential to see the stock outperform the market for years or even decades. And thanks to the power of compounding this leads to much higher gains over the long haul, which is why Dollarama stock is the better long-term investment.
Dollarama is also a defensive stock and has proven it can grow its sales and profitability whether the economy is facing surging inflation or a recession or even in times of strong economic growth.
Air Canada stock is certainly in an industry with attractive long-term growth potential, but it also faces stiffer competition and will be impacted by changes in the economic environment.
For example, over the last five years, Dollarama stock is up 74% compared to Air Canada stock, which is up just 19% due to the fact that Dollarama was able to weather the pandemic better. However, even since the bottom of the pandemic selloff and the start of the recovery on March 20, 2020, Dollarama has outperformed Air Canada stock, gaining 141% compared to 99%.
Therefore, although Air Canada stock may be more undervalued, Dollarama’s defensive qualities and consistent growth make it a better long-term investment.
