I Was Wrong About Air Canada Stock

I had the wrong take on Air Canada (TSX:AC) during the COVID-19 pandemic.

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Air Canada (TSX:AC) stock has been one of the TSX Index’s biggest losers over the last four years. Falling 60% in price since its early 2020 highs, it has dramatically underperformed the index. Curiously enough, the company itself has more or less recovered to — indeed surpassed — its pre-COVID revenue and earnings levels. Free cash flow remains down from 2019, but the company is much closer to its 2019 self than its mid-2020 or even 2021 self today.

I’ve had varying opinions on Air Canada stock over the years. In the early innings of the COVID pandemic, I considered the stock a sell because of the financial damage that was to come. I don’t regret that opinion. However, I maintained my bearish opinion far too long into the bear market and failed to recognize that the stock was a good value at its March 2020 lows. In this article, I’ll explain where I went wrong with that take.

The post-COVID recovery was inevitable

One reason why I thought Air Canada still wasn’t worth it even at the COVID lows was because the company’s post-COVID recovery wasn’t so obvious then. At the time, the “tone” from public health officials seemed to indicate that the public safety measures would continue until the pandemic was officially over. However, all of these measures were scrapped by early 2022, with the pandemic still raging. China, the last holdout, ended its lockdowns in December of 2022. As of this writing, COVID-19 is still officially classified as a pandemic, although numbers are no longer being reported on a regular basis.

One of the reasons I didn’t see Air Canada’s rapid recovery was because there was little indication at the time that policymakers would end the public safety measures without the pandemic ending. I thought that the travel restrictions that were hurting Air Canada so much would go on longer than they did. Eventually, the vaccine was released, and public safety measures started being relaxed from that point onward. It was around that point that AC stock began to recover.

Why the stock has been languishing

When Pfizer’s COVID vaccine was announced, Air Canada rallied to $29 pretty quickly. However, it fell back to $20 and is actually all the way down at $18.50 today. I revised my opinion on Air Canada around a year ago, figuring it a buy at $18. I still think that it is.

At today’s prices, Air Canada trades at a mere three times earnings. It is far cheaper than the generally cheap stocks found in Canada’s banking and energy sectors. True, it now faces the threat of rising fuel prices, but this risk is not like the one the company faced in 2020: AC won’t go bankrupt or even lose money because of high jet fuel costs; it will just become less profitable. So, at three times earnings, Air Canada appears cheap.

I would be comfortable owning AC stock today

I’d be perfectly comfortable holding Air Canada stock at today’s prices. It borders on deep-value territory and the risk factors it faces today are manageable ones. I was wrong to have been bearish on it as long as I was.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Pfizer. The Motley Fool has a disclosure policy.

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