Written by Puja Tayal at The Motley Fool Canada
Air Canada (TSX:AC) has been an eyesore for those who bought the stock at $26. The global airline industry has overcome the worst operating environment and demand and supply shocks. Now, it is on the runway to revival. The only roadblock on the path is high net debt, which the airline is working on repaying. This brings us to the question of whether the improving fundamentals of Air Canada make it a share worth buying and holding.
How to trade in Air Canada stock for gain?
The airline stock is seasonal, with June and July being the peak season, as summer holidays see demand for leisure travel pick up. International travel demand has almost recovered and is likely to reach the pre-pandemic level in 2024. That is the time you can expect some uptick.
However, the economic weakness has been building suspense of a recession by the end of this year or early next year. This uncertainty has made investors less risk averse and opt for bank deposits offering higher interest rates. At this point, we can consider two extreme scenarios and build an investment strategy that benefits you.
Scenario #1: A recession
In the worst-case scenario, a recession could strike. Air Canada stock could fall to its pandemic level of $14. Recovering from a recession could take at least three years. Airline stocks are not a good choice for a weak economy, as airlines are capital intensive and always carry significant debt. Over the years, they have become efficient and turned profitable. Yet many are still prone to bankruptcy if travel demand drops, as they need a higher passenger count for a flight to make profits.
Air Canada’s fundamentals
Air Canada’s third-quarter earnings showed faster improvement in profits and cash flows. The airline reported its highest net income of $2.09 billion in the nine months of 2023. Yet the share price remains subdued, because Air Canada issued new shares to raise equity capital during the recession, which diluted shareholders’ interest. Hence, the stock has become more rangebound, and its valuation looks expensive even when it trades at $18.
Remember, an airline is profitable when operating at +70% capacity. If a recession strikes, air travel demand could slow, affecting Air Canada’s profits and share price. It won’t be surprising if the stock dips 20-30% from its 52-week low of $16. However, Air Canada can sustain a recession thanks to its $9.9 billion liquidity, hinting that the stock has the potential to recover after a recession. If you buy the stock at $18 or below and a recession pulls down the stock price further, you can buy some more stocks at the dip and hold it for three years to see a recovery rally to over $24.
Scenario #2: Current market volatility continues
The stock market has been treading with caution over fear of a recession. But if the economy can avoid it until late 2024, you could benefit from the seasonal surge in Air Canada stock during the summer. The airline could see summer ticket booking between June and August. Cash inflow has a positive impact on the stock price. If this seasonality persists, the second-quarter earnings could push the stock price to $24 and above.
The stock need not maintain the $18-$25 range. The price momentum is driven by a stock’s trading volume. Hence, watch for the Relative Strength Index (RSI), which measures the 14-day average price momentum to determine if the stock is overbought (>70 RSI) or oversold (<30 RSI). In October, Air Canada’s RSI fell below 30. Even now, it is around 38. Once the RSI comes closer to 70, you can sell the stock and book short-term profit.
In an uncertain environment, consider different scenarios and understand if the stock can survive the worst. If you are not confident, do not invest in highly volatile stocks. Instead, opt for less-risky dividend stocks, like Enbridge or Telus, where the stock prices don’t see significant momentum.
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