Source: Getty Images
Based on the recent price action of Air Canada (TSX:AC), it’s impossible to visualize it as a possible millionaire maker for stock investors. The volatile stock see-sawed up to $26 per share before crashing down to about $17 and settling at approximately $18 at writing.
Before then, investors who managed to grab the stock at a 2022 low of $16 would have maximized gains at about 62% if they timed it very well by taking a profit at $26 about 11 months later. (Of course, there were plenty of ups and downs in between that investors had to endure.)
To get an end result of $1,000,000 with this short-term trade, investors would need to have invested about $617,284. I would imagine that few investors would be willing to risk that much money for the potential of running it to $1,000,000. Instead, it would be smarter to diversify the amount across a diversified portfolio of stocks that likely have lower risk and more predictable businesses.
Due to the global financial crisis of 2007-08 and again in 2011-2012, Air Canada stock traded as low as about $1. Investors with the tenacity to hold on to their shares could have sold at a peak of $51 in 2020. Under this perfect scenario, investors only needed to have invested $19,608 to hit a million dollars.
This is only clear in hindsight, though, as I’m obviously cherry-picking price points for illustration purposes. In practice, it’s not so easy to buy and hold risky stocks — unless you size your positions accordingly, limiting them to a small percentage of your diversified basket of stocks.
Air Canada is undeniably an unpredictable stock that is above-average volatile. Surely, it is highly cyclical, with results that may be tied to the boom and bust of the economy. It is a speculative stock, seeing as its S&P credit rating of BB- is non-investment grade.
To be sure, let’s take a closer look at its balance sheet. It ended 2023 with a debt-to-asset ratio of 97% and a debt-to-equity ratio of 36.9 times versus 2022 105% and a total shareholders’ deficiency of $1.56 billion. It also ended 2023 with a net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 1.1, a big improvement from 2022’s 5.1 times, as Air Canada’s long-term debt and lease liabilities shrunk by $2 billion, while the adjusted EBITDA climbed by $2.5 billion. The passenger revenue (its biggest contributor) jumped 36% year over year. In this sense, this may be the start of a turnaround for the business.
Air Canada is undoubtedly a risky stock to own. However, it seems to get backing from the government at critical times. For example, around April 2021, the Canadian airline got an emergency financial aid of $5.9 billion from the government, as the industry was significantly impacted by the COVID-19 pandemic. The aid was in the form of low-interest loans and a $500 million equity stake in Air Canada shares.
The airline’s revenues are highly based on consumer demand affected by their desire to travel. Its biggest operating cost items are aircraft fuel (24% of 2023 revenue), which can be volatile, and wages, salaries, and benefits (18%), which can increase meaningfully from higher inflation.
In conclusion, Air Canada stock could potentially make good money for investors if you time your trades, but it would not be smart to bet one’s life savings on it. Since it’s a speculative and risky stock, interested investors should size their positions accordingly. Also, consider holding shares in a non-registered account in case a loss is the end result so that capital losses could be used to offset capital gains. Analysts generally believe the stock is undervalued today and could appreciate about 60% based on the consensus 12-month price target.
