The Canadian Investor - Episode 18 - Should you Invest in Air Canada?

Episode Date: March 23, 2020

In this episode, we talk about Air Canada and if we think it’s a good investment with the stock being down 75% from its recent highs. We discuss the difference between an S&P 500 index fund and US t...otal market index fund. We finish this episode with more talk about market volatility and our Tip of the D’eh!Tickers of stocks mentioned : CAE.TO, AC.TO, XUU.TO, VFV.TO, VUN.TO, XSP.TO--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

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Starting point is 00:00:00 Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is
Starting point is 00:00:45 coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. Live from the great white north, this is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. Welcome back to the Canadian Investor. I'm joined by my co-host, Brayden Dennis.
Starting point is 00:01:33 So we're here to talk to you about a bit more of what's going on in the markets today. We'll talk about Air Canada. We'll also talk about the S&P 500 versus total u.s market uh index funds and we'll finish with our tip of the day hey brayden how's it going it's going man it's uh what day eight in uh self-isolation or social distancing and i'm already feeling like tom hanks cast away, man. Like, I cannot grow any facial hair. Like, it's actually really, really sad. But I'm looking at myself, man. I'm like, hey, this could be something, you know?
Starting point is 00:02:15 This could be the start of some facial hair for me because I don't have to impress anyone right now. How are you, man? Yeah, I'm good. I was going to say it looks like you haven't showered in like 10 days dude i'm a mess i'm a mess i just showered today i i am clean okay but uh yeah no like uh i need to seriously mix in some self-care man i'm just working a lot i'm using this as an opportunity to just grind, man. I mean, this is a complete side note, but people who are looking for that side hustle that they've wanted to do, I mean, this was always a side hustle for me. Stratosphere Investing has always been a side hustle for me. And it's now a very good business. So this could be your time to pick something up. That's just my hot take.
Starting point is 00:03:06 Yeah, exactly. I mean, if people are looking for a side hustle or just, you know, a main source of income, if they've been affected with their job with the coronavirus, I know like just an idea outside the box. If people are good at customer service, I know Amazon is one of the few places that's currently hiring right now. And I know they have a lot of customer service, I think reps is one of the few places that's currently hiring right now. And I know they have a lot of customer service, I think reps that do work from home. So that is an option for people. But if people are willing to get creative, there are some options out there.
Starting point is 00:03:35 How about this? Okay. If you email me, braden at stratosphereinvesting.com, and you're passionate about self-directed investing, send me an email because I always need help writing articles. Simon helped me out this week. He's getting in the game. I need help, guys. Seriously, send me a message. We can figure something out. But let's talk about Air Canada.
Starting point is 00:03:59 I'll let you take the floor on this one first. There's lots to talk about with Air Canada. Yeah, so Air Canada. Well, where to start, I guess. Obviously, everyone knows them. It's an airline company, the biggest one in Canada. I've actually had the question from two of my buddies. I know we had the listener question as well.
Starting point is 00:04:21 And Braden can do a shout out when it's his turn. Colin, thanks for the email, buddy. And so thank you, Colin, as well and braden can do a shout out when it's colin his turn colin thanks for the email and so thank you colin as well so i think looking at air canada it's hard to not uh look at it and think it might be a good value play um just looking i think the recent highs were as in the 50s just looking at it 52 i think dollars 510 I think, if I'm seeing this correctly, is the peak. Okay, and then we have right now today, it's at 12.70. So there's a lot of good reasons for that. Obviously, the airline industry has been completely hit,
Starting point is 00:04:58 whether it's Canada, U.S., worldwide, just the travel industry in general. So there's definitely a good reason for that. So my first take on that is buyer beware, I would say. We were talking about this before we started recording. It could definitely still get worse for Air Canada. I'll let Brayden talk a little bit. But the first thing I wanted to mention is a lot of people mentioned to me, oh, but you know, the Canadian government will never let them go bankrupt. Fair enough. I mean, I think it's, it's most likely the government won't let them go bankrupt. But at the same time, if the government gives a bailout to Air Canada, it's going to be filled with conditions. And most likely if they're injecting money, they're going to ask for equity in Air Canada. So what this means is if you're an existing shareholder
Starting point is 00:05:51 and the government pours in billions of dollars to bail out Air Canada, well, you're going to be diluted. So yes, it's good. They're not going bankrupt. I totally agree with that. But at the same time, if they're diluting your shares, going bankrupt i totally agree with that but at the same time if they're diluting your shares it may take you a lot of time to make that back just because of that sole thing that they did is diluting the the capital yeah good point i mean the bailout could ensue if this gets really ugly
Starting point is 00:06:21 it really just depends on how long this lasts because no business can go without revenue for like 18 months. A few can go without revenue for a few quarters. Air Canada, I don't know how many quarters they can go with basically not doing anything. They bought Air Transat earlier in 2019. And Air Transat today laid off 70% of the workforce, just 3,700 employees, as of recording this today on Monday, March 23rd. So I'm sorry for all those who are facing this. This is affecting people's lives, obviously, in a major way. So Air Canada is down from that peak we just talked about, 75%. And here's my take, okay? I bought the stock way back in like 2015.
Starting point is 00:07:20 I thought it was just extremely, extremely undervalued. Held onto it for two years and a bit. Made a sweet return, sold it at $30, and then it marched on to $50 while I looked like an absolute idiot because I sold it too early. And here it is at $1,270, and I think it could go to $1. I don't know. I don't put price targets on, but be aware that that is
Starting point is 00:07:48 possible. Hotels, airline, like the whole travel industry, those ones that need revenue to survive just like any other business, this is pretty tough. It could go very, very low. And if you want to pick it up, me and Simon talked about this earlier. I mean, hey, contrarian pick, it could get worse. Just be aware of that. It could get worse before it gets a lot better. And I look at this as I look at Air Canada's chart just falling off a cliff is this is a trade. This isn't an investment. It's a speculative trade. It could be an investment from a contrary perspective if they get it together in terms of COVID basically going away in the next six months, which a lot of us think that could happen and really hope that happens, honestly.
Starting point is 00:08:54 But it's just really tough to call this not a speculative trade at this point because there's so much uncertainty so much uncertainty i don't know what's going to happen and you gotta time this thing if you want returns so it's just not my style i mean you could do very well and say it marches back on up to 50 in eight months in a year while you're looking at a sweet 500% return, but this is a trade. You have to time it perfectly, and there is a lot of downside still at 1270. I don't have any really good insights beyond that. Yeah, I mean, that's probably how most people look at it in terms of trade.
Starting point is 00:09:45 So just looking at their financial statements right now. So the one silver lining with Air Canada is they do have a decent amount of cash on the balance sheet. Obviously, they have substantial amounts of debt as well. So you'd have to factor in the interest payments that they'll have to pay with probably a drop in revenue of like 75, 80 percent, if not more at the bare minimum. So interest payments, make sure you factor that in if you're looking to invest into them. The long term debt, when is it coming due? So that could create another problem for them. So those are two big things. And when you look at the financial statements, and you look at ratios, like, of course, it looks super cheap at like three p or
Starting point is 00:10:31 whatever the price earnings ratio is, but that's looking at the past 12 months, right? So people have to keep that in mind. It's not so cheap if you barely have anything for revenues. And one of the other problems with it, even though they've reduced their costs a lot by laying it off a lot of people, and it's definitely unfortunate for those people, but it was probably necessary just to keep the business alive, is they won't be able to shed all their expenses. So they're going to be losing substantial amounts of money. expenses. So they're going to be losing substantial amounts of money. So that's why it's a risky pick. Last thing that people tend to forget is the pension liabilities of Air Canada. So they have defined benefits plans for, I think they have several types of plans, but they do have defined benefits plans for its employees. So defined benefits is essentially a traditional pension
Starting point is 00:11:25 where the employer promises the plan members or the employees a certain amount when they retire until they pass away, most of the time based on a formula. Well, the problem with that is in order for the employer to fulfill those obligations is they have to make sure that the pension is properly funded. How do they do that? Well, usually they'll have it invested in a mix of fixed income and equities with the majority being in fixed income. Well, that's a bit of an issue right now because fixed income will give you such little interest. So they probably won't be able to meet those obligations without injecting more money into the pension plan or making drastic changes to the future benefits of people. Making drastic
Starting point is 00:12:14 changes could be a possibility, but there's a lot of unionized employees at Air Canada, so they'll need their agreement to be able to actually make those changes. So that's something that's definitely to keep an eye on because that will most likely cost a lot of money to Air Canada. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to
Starting point is 00:13:05 help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb
Starting point is 00:14:01 or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since airbnb.ca forward slash host. That is airbnb.ca forward slash host. That's a good point to bring up, those liabilities that exist. I'm just looking at their income statement last 10 years. And the airline industry majorly changed in 2013 when they started to basically they turned from loss generating machines to profit generating machines in 2013 and 2014 not just here in Canada like a lot of the North American airlines and that's when they became very interesting investments in my opinion and they made yeah they went from losing $0.50 a share to gaining $0.35 a share.
Starting point is 00:15:08 And from 2012 to 2014, all the way to $5.50 of earnings over the last 12 months with just a little over $19 billion in revenue. little over 19 billion in revenue so if you do some math on just their income statement on what we said was probably safe that over the next foreseeable future at least 80 percent of revenues down at least it's got to be much more than that and they can cut back on their sales general and administrative operating expensive, which is good. Unfortunately, people lose jobs. And then you look at the cost of goods sold, which are variable expenses, the largest of that being fuel. So this gives me some optimism that their $14 billion cost of goods sold, most of that would be fuel. Like a very large portion of their operating expenses is fuel.
Starting point is 00:16:15 So it gives me some optimism when I look at these numbers that, okay, well, if they're not flying, a lot of that variable fuel expense will be zero as well. So I'd have to do some more research on basically how safe their balance sheet would be. But this gives me some optimism over two business quarters quarters three business quarters i just know that if this persists longer than that knock on wood hope it doesn't this is deep deep trouble for this company and deep deep trouble for every company not just air canada like every single company is being affected by this. So it's just, I go back to what I'm sticking with. This is a trade and it is going to be very difficult time. Are you ready to switch gears? Yeah, one last thing before we switch.
Starting point is 00:17:19 If I can add, if someone's looking to hold Air Canada for the long term, I would say wait and see how this whole COVID-19 plays out. Just because you're better off, in my opinion, waiting a little too long than going in too early if bad news keeps coming and there is no, you know, it takes a while until there's a resolution and people start flying again. Absolutely. In the airline space, another side note, CAE is a dividend growth stock that always ranks very high on my model, which is down significantly with the airline. They do the flight simulator training,
Starting point is 00:18:11 and they have really big, big, big contracts with government and all these airlines. So they will come out of this as still that go-to solution, and a lot of pilots need to be trained up from a macro perspective long term. So that's another contrarian pick to look at that might have some less trouble in terms of immediate revenue over the covid pandemic so just something to consider i don't own a position disclaimer but uh a company that i have had on my watch list for a long time. All right. So I got a question from my pal, Jack, a young guy just turned 18. I had a video chat with him the other day. Kid's ready to get investing and he's got his Questrade account set up with index ETFs. And today he asked me, why do you prefer a total market fund versus just the S&P? So the two iShares tickers would be XSP, which is the S&P 500, or XUU. And then the Vanguard
Starting point is 00:19:21 alternatives, I believe, would be VFV, which is the S&P, and then VUN, which is the total market. So basically, you're comparing the total U.S. stock market, which you're looking at around 2,000 stocks those ETFs typically hold, or the 500 in the S&P 500. 500. So when you're comparing those, I'm saying, I like that there is mid caps and small caps in the total market. And it has shown slightly, very slightly better performance over a long period of time. But seriously, do not waste a second stressing on the difference of them. And the reason for that is because the total market fund is still market cap weighted, which means the S&P 500, the big companies, are still going to have the largest portion of the total market fund. So since it's not equal weighted and it is market cap weighted, these two ETFs are almost identical, even though there's way more holdings in the total market fund because it's market cap weighted.
Starting point is 00:20:34 So don't lose a wink of sleep over it. Pick the one that has the lower management expense ratio because if there's a difference in performance we're talking about like 0.1 percent because mathematically they're almost almost identical even though the holdings are very different if that makes sense simon do you have a preference on which one you pick if you already use broad market etfs like those ones um no i mean to me it really depends what kind of exposure you want that's probably the the most the easiest way to put it do you want like the 500 biggest companies uh well 500 some of the 500 biggest companies it's just easier to say that i know the s&p has a selection process but yes
Starting point is 00:21:26 yeah exactly but it's yeah that's an easy way to put it or do you want a total market including like braden said small cap medium caps large caps so that's the question you'll need to ask yourself um i personally i mean i think they're both really good options they're both really uh low low fees so you can't really go wrong with either of them but if you're especially if you're using quest rate and you have the option to to buy ETFs without incurring any costs I would recommend just do a little bit at a time hell buy one share every day if you want for the next 150 days whatever it is you won't have extra commission so I would say either way just make sure your dollar cost average yeah good point I mean there's no downside to
Starting point is 00:22:13 dollar cost averaging often when you don't have commission fees you have to pay the ECN like the exchange what does the C stand for something C network for like a couple cents on each transaction when you're buying ETFs on Questrade. So really, it's basically zero, the commission. So there's no real downside to say you want to put in a couple hundred every week or whatever it is. Even if it's 50 bucks, get one, two shares, who cares? There's no downside to doing that because you're not going to face that commission fee of $5 or the $10 with a lot of the other big banks. So yeah, I mean, may as well do it. But to answer your question, Jack, either one is a great option if you want to do broad market ETFs.
Starting point is 00:23:06 You really can't go wrong. What Simon said, whatever you're more comfortable with, but at the end of the day, because they're market cap weighted, they are almost identical. Simon, when you check your brokerage account these days, how are you feeling? Are you getting excited or are you starting to feel a little pessimistic? What's going on? Tell me. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have
Starting point is 00:23:34 been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com.
Starting point is 00:24:22 That is questtrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away.
Starting point is 00:25:18 Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. That is airbnb.ca forward slash host. Probably a mix of both emotions, I would say. It depends on when. Yeah, I mean, whenever there's uncertainty, it's for sure not easy to invest because if it was, everyone would be investing right now. And obviously, everyone is not investing right now because there's more people selling than buying. That's why the market is going down.
Starting point is 00:25:55 But you have to keep in mind if there was certainty in the market, let's say, and we were talking about this, let's say Halloween 2020, October 31st, we know there's a vaccine that's going to happen. It's already known. We know it's just going to be six, seven months, a really hard period, but we know what's going to happen. So therefore, the market would most likely just price in this outcome. Right now, the issue with it is there's so much uncertainty, it's really hard to know where it's going to go, how bad it's going to be. But again, these are the type of situations where oftentimes you'll be able to find the best opportunities within the stock market, but
Starting point is 00:26:39 it's just not easy. I mean, if it was, everyone would have a private island and be multi-millionaire right yeah i mean if if you could predict what was going to happen with global events or financial markets well you'd be the richest person on the entire earth uh you'd be richer than jeff bezos because you could just make a couple massive trades over the course of 10 days and multiply your money. So the fact that you can't do that is exactly why the stock market has so much uncertainty. The world has a lot of uncertainty right now man like this is this is just different like like i i mean i'm using i'm using the new slang man this is just hitting different man i no one knows what's going on everyone's kind of just waiting and and doing the right thing most people are doing the right thing staying inside
Starting point is 00:27:43 looking after the people who are immunally compromised, looking after their older folks and their parents. So I think almost everyone gets it. I still see some people not getting it yet. And Ontario just announced that at midnight tonight, non-essential services are being completely shut down announced by the conservative uh premier doug ford today that uh starting at midnight so they're announcing what the non-essential services are tomorrow so yet to be seen i just hope they don't shut down all the golf courses man like i can't think of a better isolation activity than playing 18 holes but uh that'll definitely get canceled i'm being a little selfish the people who work there are definitely going to get exposed to people who
Starting point is 00:28:38 need to go to the golf course but man it's finally spring and I want to play some golf. Yeah. And I, I mean, totally agree with everything you said. And for like, please do some social distancing. I've heard people I've read online. They just think like, Oh, I'm not showing any symptoms. I'm fine. Like people have not been doing research on this if they think that you can be up to 14 days without any symptoms. A lot of younger people will get very mild symptoms. They might not even think it's that. Problem is, if you get into contact with someone that's vulnerable, you might think you're fine. Then you go and see your parents that might be in their 50s or 60s. They're more at risk. And then you can potentially cause harm
Starting point is 00:29:25 to those you love. So you have to, I know it's not an easy situation for everyone. But the quicker we do it, the quicker we buckle down, the faster this is going to be for everyone. So I mean, that's the one thing I would say I still see, especially younger people, they'll think. And I'm 34, so I'm not very at risk. But I just I get super frustrated. Just honestly stop being selfish for those who think that that's probably my my rant right there. Yeah, no, it's it's definitely like everyone has to work together on this, even though you don't come in contact with everyone, with anyone or with at least the people you live with. That would be the most. So everyone's got to do their part, which is just do nothing.
Starting point is 00:30:19 All right, guys, there is so much information out there on this. So, you know, just follow what people are telling you to do. Everyone is saying, just stay home. That's all you got to do. Just stay home. See, it's real easy. I'm going to switch to the tip of the day, which I think is very timely on what we're talking about, about, which is that you are able to be heavily pessimistic about the stock market and financial markets in general, and still be a aggressive net buyer in stocks.
Starting point is 00:31:00 You are allowed to be both things. And this is my tip of the day, is that I as one am very pessimistic about the global economy right now. It is very uncertain. Manufacturing is at a complete halt. People are not going. Small business is getting absolutely crushed. But you can still, like myself, be aggressively buying stocks. Because this is the time to buy businesses. And in six months from now, I might say they weren't on sale because that's how bad the economy was. But over the long term,
Starting point is 00:31:40 I am very aggressively a net buyer of stocks, more so now than I ever have, even though I am aggressively pessimistic about the economy. You can be both. It's okay to think that the stock market is a questionable place for money right now and still be that long-term aggressive net buyer of stocks. It's okay. Simon, do you agree with that? Yeah, I mean, that comes back to what we were saying about uncertainty. We really don't know where it's going right now. So we can be, you know, you can be pessimistic about the economy as a whole and be buying stocks. I could be a bit more positive and still be buying stocks. It's hard to say. I mean, you can make a case that the stock market is already pricing in like the worst case scenario
Starting point is 00:32:38 and right now is the bottom, but it could also get worse. So that's why I'm also buying stocks. I bought some more today. I'll probably buy a bit more this week. Just continue to dollar cost average, find some great businesses, get that cost lower. And in the long term, whether it's 5, 10, 15, 20 years, it should play out pretty well for you. Absolutely. So guys, this time, you know, while you're staying home, could be a time to pick up side hustle. I'm going to hit back on this because I think it's important. Do things that you've never been able to do because you didn't have enough time.
Starting point is 00:33:22 Now is the time, you know, you don't have to marathon 17 shows on Netflix. It could be time to pick up a new skill. I've recently picked up web development. I'm learning JavaScript and all the other languages for web development. And it feels good, man. Just pick up something. And if you really want to reach out to me,
Starting point is 00:33:47 braden.stratosphereinvesting.com, send me an email if you're interested in writing. I got to give a shout out to a guy named Cade, Cade Seaton out in Edmonton. He has been writing some really awesome content for the blog. Young kid, just wants to learn. And if that's what you want to do, hit me up. Absolutely.
Starting point is 00:34:09 All right, guys, that does it for this episode. Go to getstockmarket.com. I recently added a ton of U.S. stocks in there as well because there's been a really nice pullback in the market on expensive, big, large cap stocks that I think are very attractive in the US right now that I always thought were really expensive. I added them to the list on getstockmarket.com. So head over there now, enter in your email, boom, I send you the list and there you go. All right, everyone stay safe,
Starting point is 00:34:41 and there you go. All right, everyone, stay safe. Stay inside. It's all you got to do. Pick up a new skill and we will see you next week. Bye-bye. The Canadian investor is not to be taken as investment advice.
Starting point is 00:34:56 Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions. Thanks for listening to this episode Always make sure to do your own research and due diligence before making investment decisions.

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