You might think that with the recent bankruptcy protection filing by the parent of American Airlines, the debt crisis that's swirling in Europe and the still fragile state of the world economy, investors would be wise to stay clear of the notoriously volatile airline sector.
Yet, those brave enough to ride out the turbulence have been rewarded so far this year. Since the start of 2012, the Guggenhein Airline ETF - which tracks the performance of 21 major global airlines - is up more than 25 per cent. Here at home, Air Canada is up about 35 per cent and WestJet Airlines 17 per cent.
Citing this improved sentiment and decent passenger traffic numbers of late, RBC Dominion Securities Inc. analyst Walter Spracklin today upgraded both Air Canada and WestJet to "outperform" ratings from "sector perform."
While macroeconomic uncertainties remain, "we expect investors will start to look over the valley and that sentiment is turning positive on the prospects for improving conditions in the back half of 2012 and into 2013," Mr. Spracklin said in a research note today.
For Air Canada, he raised his price target by 50 cents to $2, which suggests investors could be looking at more than a 50 per cent return over the next year.
But he stresses this isn't a buy and hold recommendation. Air Canada is facing a number of risks, including meandering union negotiations, plans to launch a low-cost carrier, and funding requirements for its longer-term fleet plans.
But these concerns are longer term. Short-term risks, he contends, are mitigated by the airline's $2.2-billion in cash on its balance sheet.
"We highlight this as a very attractive short-term trading opportunity," he said.
As for WestJet, he thinks investors have yet to fully factor in its attractive fundamentals relative to the airline group as a whole.
"While WJA has yet to report fourth-quarter (scheduled for Feb. 8th), results from U.S. carriers have come in better-than-expected and have been rewarded by a sharp snap-back in multiples and returns. This tailwind has yet to be fully realized with WJA as the shares have moved roughly 22 per cent off of near-term lows, as compared to the AMEX (airline) Index which has returned 39 per cent. As such, we believe the WJA shares have additional upside in the near term," he said.
Mr. Spracklin raised his price target on WestJet by $3 to $16.