Investing in high-quality stocks trading lower than intrinsic value, or undervalued stocks, can be an excellent way to put your money to work in the stock market. However, not every stock trading at a substantial discount from its all-time highs might be a good investment to consider. Some stocks see share prices decline because of very valid reasons.
The flag-carrying airline stock, Air Canada (TSX: AC), seems like an attractively priced investment. However, a closer look at the beleaguered Canadian airline stock might want to make you reconsider adding it to your holdings. We will discuss the airline stock and what has happened over the last few years to paint a clearer picture.
A look at Air Canada’s stock price history
Air Canada’s stock price has two distinct periods: One was the years leading up to the pandemic, and the second is what happened after it struck. Air Canada stock share prices were on an upward and positive trajectory. For over a decade before the pandemic, it was one of the most sought-after stocks due to its performance on the stock market.
Between December 2010 and December 2019, Air Canada’s share price soared by over 1,300%. Besides its share price delivering multi-bagger growth to investors, the underlying company posted several quarterly performances that broke records it set.
Then came the pandemic, and everything came crashing down. Due to domestic and international travel restrictions, airlines worldwide saw operations shut down completely. When operations halted, Air Canada saw its share price plunge. From being close to $50 per share, its share price went as low as $12.41 per share in March 2020.
As of this writing, Air Canada stock trades for $18.17 per share, still barely above its March 2020 low.
Is there a case to buy Air Canada stock?
Investors who always look at the bigger picture do not necessarily worry about short-term difficulties for stocks. As long as the underlying business has the potential to recover and deliver further growth, they might add the stock to their holdings.
Air Canada arguably saw its share price decline due to a halt in air travel demand amid the pandemic. However, air travel demand has improved significantly as the world has moved into the post-pandemic era.
Air Canada stock’s latest earnings report reflects the growth in demand. The company’s revenues increased by almost a fifth from the same period in the previous year. The stock reported an $850 million year-over-year improvement in its earnings. The primary reason for this improvement is only a growth in air travel demand. Does that make it a buy? That might still be debatable.
Foolish takeaway
Warren Buffett once described airlines as being some of the worst businesses to invest in. Why? Airlines tend to grow rapidly, they demand substantial capital to operate and do not earn a lot of profit. The smaller margins that Air Canada generates make it an investment that might be too risky for the more conservative investor.
If you do not like taking big risks with your investment capital, Air Canada might be a stock that is better to watch from the sidelines.
