Choose CargoJet over Chorus Aviation, this portfolio manager says

CargoJet or Chorus Aviation? Investors looking for a good bet within the airline industry might be thinking about Chorus Aviation (Chorus Aviation Stock Quote, Chart, News TSX:CHR), a stock some might call the defensive play within a sector notoriously prone to economic fluctuations.

But even considering the company’s juicy dividend —and with the stock’s pullback over recent weeks— Avenue Investment’s Bryden Teich says the wiser play would be overnight freight company CargoJet (CargoJet Stock Quote, Chart, News TSX:CJT), arguing that an economic downturn is bound to cause more trouble for Chorus.

Chorus Aviation’s share price was trending higher over the first half of 2019 but the stock hit a roadblock last month as the regional airline lessor posted a year-over-year decrease in revenue in its second quarter from $354 million to $333 million.

Currently, CHR is up 31 per cent year-to-date while the stock’s dividend yield sits at a comfortable 6.5 per cent.

Yet the conventional wisdom is that airlines will suffer when the economy slows and spending trends become more conservative, which even with its leasing business will make it tough for Chorus, says Teich, portfolio manager at Avenue Investment Management, who spoke to BNN Bloomberg on Tuesday.

CargoJet or Chorus Aviation?

“We don’t own Chorus. We had owned Air Canada about a year ago and that’s performed well for us. The nice thing about Chorus is that you’re protected by a pretty good dividend yield. But still, you’re entering a part of the economic cycle where I think that airlines are going to be under pressure,” says Teich.

“It’s not the time that you want to be looking at the airlines,” says Teich. “The one that we do like and has performed well is Cargojet. We don’t own it but it’s on our list. The overnight freight parcel business has been a boom for Cargojet as is teaming up with Amazon. So there’s much more of a tailwind for an airline with those kinds of dynamics than going into Chorus at this end of the cycle.”

CargoJet saw its share price spike last month on news that it had landed a new strategic agreement with Amazon, one which would see the e-commerce giant own up to 14.9 per cent of CargoJet if it delivers $600 million in revenue to CargoJet’s core overnight network over the next 7.5 years.

In terms of the other big names in Canada’s airline space, notably, AirCanada and WestJet, Teich says that the latter’s takeover by private equity firm Onex Corp will be a benefit to the company as it’ll allow more space for WestJet to get its affairs in order.

“The unique situation with Air Canada is that they’ve turned themselves around and so the stock has performed very well,” Teich says. “Obviously, WestJet has been having a rough time and has been taken over by Onex. We’re actually Onex owners so we’re playing a WestJet recovery through Onex.”

“WestJet was definitely having problems, and being a public market stock especially as an airline where you have to be reinvesting in the business in a big way, I just think it’s much more difficult to be a public company. This way, they can restructure it and redefine their growth trajectory within Onex without facing the quarterly scrutiny that Bay Street would give them,” he says.