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Lessons for Investors in Air Canada Shares


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Written by Chris MacDonald at The Motley Fool Canada

Tomorrow is a very dark day in the airline industry. September 11, 2001 was the day we saw a terrible tragedy befall the United States. It was also a day that is forever etched in the minds of investors in the airline industry. While Air Canada (TSX: AC) was not the same airline it was back then (Air Canada shares weren’t even listed in 2001), Canadian airlines weren’t immune of this madness.

What happened 20 years ago was certainly tragic. Indeed, looking at this event through the lens of investors, the events of September 11 have highlighted some key risks for the sector.

Let’s dive into a few lessons for Air Canada equity investors right now.

Black swan events affect different sectors differently

Air Canada’s actions have been absolutely hammered in the wake of the pandemic. Any sort of disruption to the “day to day” of the airline industry is a bigger problem than for many businesses.

The pandemic reminds me a lot of September 11 in terms of the sensitivity of airlines to various macroeconomic shocks. Unlike other industries that have found a way to weather the pandemic, airlines are capital-intensive businesses that require near-capacity operations to generate profits. So any kind of shock can be more severe than what is seen in other sectors.

This higher level of risk for long tail events is bearish for investors. Therefore, airlines have traditionally traded at lower valuation multiples to reflect this risk.

Airlines go bankrupt, but they explode too

It wasn’t that long ago that Air Canada was on the verge of bankruptcy. Indeed, investors who have been in the market for more than a few years may remember the rather grim picture that was painted for airlines in earlier periods of history (including after the Great Recession).

In 2012, investors could buy Air Canada shares for well under $ 1 per share. Today, even though Air Canada’s stock is still more than 50% below its all-time high, investors who bought the decline about a decade ago are bagging a 23rd.

Not bad.

These highly cyclical stocks represent higher beta play across the market. Therefore, riding a bull market with airlines is a great way to build wealth. However, bust cycles can also be vicious and last for quite some time.

Net income on Air Canada shares

In my opinion, Air Canada shares remain one of the best airlines for investors to consider. The Government of Canada will always have Air Canada’s back. And in Canada, there are really only two options for Canadians who want to travel.

As a result, investors bullish for the next airline bull cycle may want to take a look at Air Canada stocks i.e. for those who are really bullish we will be back to normal soon. .

After September 11, that was 20 years ago: Lessons for Investors in Air Canada Shares first appeared on The Motley Fool Canada.

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Foolish contributor Chris MacDonald has no position in the stocks mentioned in this article.



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