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It is never popular to buy stocks that have been out of favor for a long time. Investors like it when stocks have been rising for some time before they buy them. For that reason, they usually prefer to pay high prices for stocks that may or may not be good, but could definitely have been bought at a lower price.
In this article, I'll explore a downed TSX stock whose name has been so tarnished that it might seem ridiculous to even mention it, but it has a few things going for it under the hood.
Air Canada
Air Canada (TSX:AC) is one of the worst performing TSX stocks over the past five years. It peaked at $52 in February 2020, fell 70% in the early months of the COVID pandemic, eventually rose to $20 when the vaccine was announced, and then fell as low as $15 for reasons that weren't entirely clear. Today it trades at 3.7 times earnings, making it one of the cheapest major Canadian companies.
Now, when I say that AC was defeated for reasons that are not entirely clear, I don't mean that it was defeated for no reason. Air Canada's post-COVID recovery was difficult at times; For example, it had to pay huge jet fuel costs in 2022. Yet today, at $16.40, the stock is closer to its COVID low (set when it wasn't very profitable) than its post-COVID high. $27 vaccine ad. It seems strange that AC stock is now relatively close to its levels in the midst of the COVID-19 pandemic when there were serious doubts about whether the company would survive.
Three things are clear today:
- AC stock is very cheap based on its multiples (3.7 times earnings, 0.3 times sales, 1.5 times cash flow, etc.).
- Oil prices are on a downward trend.
- The possible strike, the most recent scare that caused people to sell air conditioning, was averted.
It would seem that Air Canada should be profitable and able to at least maintain its profit level in the future. If I'm right, then the stock is cheap and should go up in the future.
Constant recovery
Air Canada has been recovering admirably since the COVID-19 pandemic put its profitability in doubt. The company's most recent earnings release showed a small setback on the profitability front, with net income declining 50% to $410 million, or $1.04 per share. The markets took it badly, but if earnings stay at $1.04, then the P/E ratio rises to 3.94; that's still much cheaper than average. It implies that AC has considerable ability to return wealth to shareholders relative to the amounts shareholders are now paying.
silly takeaway
Buying a stock like Air Canada right now won't win you many friends. It's been down for a long time. However, history shows that stocks that fall beyond all reason are usually good buys. For this reason, I would feel comfortable holding AC stock today.