What if you could find cheap stocks down 60% from their all-time highs, that nevertheless offered decent prospects of high returns?
In March of 2020 and the latter months of 2022, such opportunities were everywhere. When the markets as a whole crash severely, the buying is usually extraordinarily good.
These days, the buying as a whole is not especially ripe. The markets have admirably recovered from their 2022 lows, and the indexes are beginning to look expensive. For example, the NASDAQ-100 Index currently trades at 29 times earnings! That’s not cheap. Nevertheless, there are some individual stocks out there that look fairly cheap. In this article, I will explore one such stock that may reward investors handsomely into the future.
Air Canada
Air Canada (TSX:AC) is Canada’s largest airline. It is well-known across the country, so a description of its operations probably isn’t necessary. Suffice it to say, it’s a vital component of Canada’s transportation infrastructure.
Air Canada stock got beaten down severely in the March 2020 “COVID crash.” As part of the COVID-19 countermeasures that were implemented at the time, provinces implemented mandatory “14-day quarantines” upon entering. This disincentivized long-term travel. In addition, long-distance travel to many foreign countries was banned outright. For example, travel to Italy was banned in the early months of the pandemic – I personally had a flight cancelled on me for this very reason!
With all these temporary bans, it made little sense to book flights in the first place. Not only did you risk getting the flights cancelled, you’d also have to wait many months to get the money back (again, I speak from personal experience on that one). Plus, you’d likely have to quarantine for 14 days on arrival. In such an environment, “sheltering in place” made more sense than travelling. As a result, Air Canada’s revenue declined 86% in 2020, and its profits turned negative.
Why it’s not going back to the 2020 lows
Despite the fact that Air Canada stock remains down some 67% from its pre-COVID highs, it most likely isn’t heading back to the 2020 lows. In fact, it’s presently fairly cheap, trading at just 12.7 times earnings. It may be worth a look.
Today, Air Canada stock is in a downtrend because of rising fuel prices. Fuel prices have been fairly high in recent months, because OPEC and Russia cut oil output and the Israel-Hamas war has raised the spectre of a broader Middle East conflict. Buyers are using futures to bid up oil prices, and that’s pushing up jet fuel prices as well.
This all sounds like bad news, but it’s nowhere near as bad as what was going on in 2020 and 2021. The COVID-19 pandemic caused AC to lose billions of dollars a year. Today, the rise in jet fuel prices is only threatening to reduce the amount of profit, not replace it with losses. So, Air Canada stock should not revisit its 2020 lows – at least not if investors were pricing the stock appropriately back then.
Foolish takeaway
Having established that Air Canada stock is unlikely to revisit its 2020 lows, the next logical question is:
“Is it actually a buy?”
Tentatively, I would say that Air Canada stock is not a bad buy. I do not have a specific price target in mind for it, but it seems quite cheap at today’s price, and likely to exceed investors’ gloomy expectations. Whether it can get back to $50 is anybody’s guess, but I’d say that those buying today will see the stock appreciate to $20 sooner or later.
