Whenever a stock sheds more than half of its value, it can feel tempting to throw in the towel before shares further decline into the depths. Indeed, admitting to defeat and moving on could be a wise move for those who no longer believe in the long-term investment thesis. Of course, selling after such a staggering drop could be a regretful move, especially since the expectations bar might already be lowered to the floor after you’ve hit that sell button.
At the end of the day, the road ahead matters more than the path behind. So, if nothing much about the business or fundamentals has changed, perhaps buying could be the move with a falling knife, rather than selling at a significant loss.
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Going on the hunt for deeper value
Personally, I think incremental buying is the move since it can be so hard to catch a falling knife at close to the floor. As you average down your cost basis while exploring the potential in a business that most others have given up on, I do think that patience and continuous homework are key.
Things change, and fast, especially for companies that are undergoing a transformation or turnaround. While not every company that’s shed over half of its value is a buy on the way down (lower prices often suggest damaged companies), I do think there’s a case for buying the dip in the following Canadian firm, especially given company-specific improvements amid a tough industry backdrop.
Air Canada: Getting back up to speed
There’s only so much a firm can do after a troubling period, after all. As the tides turn and the macro picture improves, I do think there’s considerable potential in a name like Air Canada (TSX:AC). For the most part, shares have been relatively grounded compared to most other airlines. As the firm looks to begin yet another one of its ascents, I do think there’s reason to think that a long-awaited breakout could be in the cards as business heats up for the summer travel season and jet fuel prices take a bit of a dive as the U.S. and Iran get closer to a peace deal.
After a remarkably good quarter and potential for bookings to keep flexing their muscles, I do think that shares of AC might have what it takes to embark on a multi-year relief rally. Of course, jet fuel isn’t guaranteed to keep moving lower, but I do think Air Canada has done a great job of trimming costs, driving efficiencies, and de-risking the balance sheet. As new fuel-efficient aircraft take to the skies while jet fuel prices look to keep on declining, I think there’s a good chance for a margin surprise in the second half.
Of course, travel and airlines are tough places to be in. But at 10.1 times trailing price-to-earnings (P/E), I do see real value to be had in the name, especially as the firm passes on more value to its customers. It’s not just about lower ticket prices, though. With free WiFi and nice perks included in Aeroplan, Air Canada is a moatier play than one would think. The COVID days are long gone. Yet, shares still trade at similar prices to five years ago. I think that’s an opportunity.
