Do you fancy yourself a risk-seeking investor?
Most people wouldn’t describe themselves that way, but depending on your investment strategy, it might accurately describe you. If you hold relatively concentrated portfolios of highly volatile deep value stocks and early stage growth names, then you probably have a higher risk appetite than most. In this article, I will explore two riskier stocks that could pay off big time in the future.
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Air Canada
Air Canada (TSX: AC) is Canada’s biggest airline. It’s also the only Canadian passenger airline that you can own as a pure-play, as its biggest competitor, WestJet, was recently taken over by a private equity firm.
How risky is Air Canada?
Going by the beta coefficient – the most widely accepted measure of risk in finance – it is extremely risky. According to Yahoo Finance, AC’s five-year monthly beta is 2.5. This means that the stock is 2.5 times more volatile than the TSX Composite Index.
Some quibble with the use of beta as a risk measure. Warren Buffett, for example, prefers using fundamental risk measures such as margin of safety and his level of certainty about future earnings. Going by “margin of safety” measures, Air Canada is also fairly risky. For example, the stock trades at 8.2 times book value.
Air Canada stock could become less risky in the future, however. The reason why the stock trades at such a high price/book ratio is because its equity is near-zero due to debt the company took on during the COVID-19 pandemic. That debt is a real balance sheet risk, but Air Canada is paying it off at a rapid pace.
Air Canada has recovered admirably since its disaster days of 2020 and 2021. In the trailing 12-month period, it did $2.1 billion in earnings; in 2020, it lost $4 billion. Despite that, the stock trades at just $16, barely above its March 2020 lows. There may be an opportunity here.
TD Bank
The Toronto-Dominion Bank (TSX: TD) is Canada’s second biggest bank. This stock is “risky” in a different sense than Air Canada is. Its beta coefficient – 0.8 – is actually lower than the index. The risks present here pertain moreso to the stock’s future earnings.
In 2022, TD Bank employees in New Jersey were found laundering money for Fentanyl cartels. Later, TD Bank branches in New York and Florida were found to be involved in similar activities. The bank is being investigated by the U.S. Department of Justice for these infractions. It has already booked $615 million in charges related to expected future fines. Analysts ultimately expect the fines to reach $2 billion.
If TD Bank ends up paying tens of billions of fines like Wells Fargo did during its cross-selling scandal, or Bank of America did during its SMC scandal, then it could be in real trouble. If, however, the fines end up being $2 billion, like analysts expect, then it will be fine. TD currently has a 10 P/E ratio, among the lowest of large North American banks. A “moderately bad” outcome with respect to money laundering fines would not put a dent in the value thesis for investing in this stock.
