Here at the Motley Fool, disagreements over the fundamental value present in stocks such as Air Canada (TSX:AC)(TSX:AC.B) typically boil to the surface for good reason. Companies like Air Canada have performed, how shall we say, terribly, in the past, and investors certainly have long-term memories when it comes to bankruptcy-related concerns and balance sheets that are less than pristine.
In that regard, fellow Fool contributor Ryan Goldsman certainly has pointed out much of the downside with owning stocks such as Air Canada, noting such companies may be excellent short opportunities in the current environment.
I believe there are an incredible number of short opportunities available to investors today, but I respectfully disagree with Mr. Goldsman on Air Canada’s merits and continue to stand behind Air Canada at its current valuation for a number of, what I believe to be, solid reasons.
In his article written approximately one year ago, in which Mr. Goldsman suggests investors short Air Canada and buy WestJet Airlines (TSX:WJA), a significant debt load and artificially low price of jet fuel were cited as the two main reasons why Air Canada is unlikely to outperform WestJet, despite both firms being levered at approximately the same debt-to-market capitalization ratio, notwithstanding the impact fuel prices would have on both firms.
Approximately one week after Mr. Goldman’s article came out, I wrote of an alternative strategy for long-term investors, one which consisted of just the opposite — going long Air Canada and short WestJet, citing a significant valuation discrepancy and fundamental factors that have played out in Air Canada’s favour. This strategy has turned out to be very profitable for investors who sought to cash in on the value mismatch between the two firms.
Valuation discrepancy aside, Air Canada has simply outperformed WestJet in terms of fundamentals and has avoided the negative spotlight quite well in the wake of high-profile events on U.S. carriers.
Bottom line
I expect the aforementioned value-related factors to continue to contribute to share price appreciation for Air Canada at the expense of WestJet and would encourage investors to dive into the fundamentals further to glean a clear picture of how the airline players in the Canadian market are likely to perform over the long haul.
That being said, any positions added in the airline space should fall within a reasonable portfolio allocation limit, given the risk profile of the sector overall.
Stay Foolish, my friends.
Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.