Deep value stocks can be risky to own if you don’t put in the proper amount of homework, lack conviction in your investment thesis, or just don’t have the time horizon to hang onto a laggard before the market has a chance to correct its pricing mistake to the upside. Undoubtedly, there’s a fine line between a deep-value stock and a value trap. Indeed, everybody wants to avoid the latter, but far too many mistake the former for the latter in search of higher reward potential.
At the end of the day, catching fast-falling knives can be riskier than momentum investing if you don’t put in the proper amount of due diligence. That said, if you’re a seasoned investor who’s spotted a vast disparity between a stock’s market price and its intrinsic value, it may be worthwhile to punch your ticket. Just don’t expect the stock to be where you think it ought to be overnight. It could take many quarters or even years before your thesis comes into play and a stock corrects to the upside.
As always, do your own homework to ensure you’re actually getting value from the name and are not at risk of hanging onto a perennial underperformer destined to continue sagging below the TSX Index. Oftentimes, cheap stocks deserve to be cheap because their underlying fundamentals (or economic moat) have gotten weaker over time, either due to operational issues or the rise of disruptors that have eaten into their share of the market.
Without further ado, consider the following stock if you’re still hungry for a deep-value play in today’s slightly frothy market! Mind the turbulence, however, if you’re easily rattled by big up-and-down moves!
Air Canada stock: Deep value hiding in plain sight?
Air Canada (TSX:AC) has been flying under the radar of many since shares failed to fly higher following the 2020 stock market crash. Undoubtedly, Canada’s top-tier airline has more than its fair share of headwinds to get through before it can ascend closer to where it was before the pandemic began around four years ago (can you believe it’s been that long?).
With ultra-low-cost-carrier Lynx Airlines recently going down, the airline scene has one less competitor to worry about. Indeed, the Lynx bust is bad news for everyday Canadian consumers looking for cheap flights.
However, for the remaining airlines, it may be an opportunity to gain share and command slightly higher prices. Though I don’t view Lynx’s absence from the Canadian market as a huge tailwind for Air Canada, I do believe that AC stock is somewhat better positioned for Canada’s economic comeback, whenever this may be.
The Foolish bottom line on AC stock
Yes, the airline business can be tough, but I refuse to view shares of AC as a value trap. Not while it’s continuing to serve so many Canadians. Over time, I do think the firm’s wounds will heal. We just need to be a bit more patient with AC as it continues to stay flat on the tarmac for the time being.
