Beaten up UK stocks such as easyJet (LSE: EZJ), IAG (LSE: IAG), and Cineworld (LSE: CINE) are getting plenty of attention from investors right now. Inspired by investing advice such as “be greedy when others are fearful”, value investors are stepping up to buy, hoping for a rebound.
Is buying such cheap, out-of-favour stocks a good idea though? I’m not convinced it is. Here, I’ll explain why I’d leave easyJet shares and those of IAG and Cineworld alone, and where I’d invest instead.
Challenges for IAG, Cineworld and easyJet shares
The thing to understand about these three beaten up stocks is that they all face enormous challenges right now.
For airlines easyJet and IAG, the operating environment is a nightmare. Governments keep changing the travel/quarantine rules and this is having a huge negative impact on customer confidence.
“We’re going backwards now and it’s really worrying for the entire industry,” said Eamonn Brennan, head of Europe’s air traffic watchdog Eurocontrol, recently. Eurocontrol believes that trips in 2020 will total six million – one million fewer than forecast in April.
The decrease in ticket sales is causing big problems for the airlines. Just recently, easyJet warned that it would report a loss of as much as £845m in its last financial year, and said that it may need government support. No wonder easyJet shares are struggling. Meanwhile, Alex Cruz, who was recently replaced as CEO of British Airways, said last month: “We’re still fighting for our own survival.”
Turning to Cineworld, it faces its own set of unique challenges. It recently announced that it was temporarily closing its UK and US cinemas due to Covid-19. Given its huge pile of debt, the outlook doesn’t look good here. It’s worth pointing out that Cineworld is currently the second most shorted stock in the UK. In other words, hedge funds expect the share price to fall.
Warren Buffett’s number one rule
Given the challenges these companies face, I see the stocks as speculative investments. Sure, there is the potential to double your money from buying easyJet shares or the others if we see a Covid-19 vaccine soon and the world returns to normal in the near future. However, there’s also a reasonable chance you could lose 90% of your money if things don’t go to plan and these companies run out of money.
I don’t see that as a good risk/reward proposition. You may as well take your money down to the casino.
I’d rather invest in a stock that offers a decent chance of doubling my money (over the medium-to-long term), with a tiny chance of losing 90% of my investment. Because as Warren Buffett says, the number one rule in investing is not to lose money.
I’d rather invest here
Instead of investing in easyJet shares, IAG shares or Cineworld shares, I’d focus on companies that:
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Are Covid-19-proof and poised for future growth in a post-Covid, digital world
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Have recurring revenues
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Are highly profitable
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Have strong balance sheets with minimal debt
Such companies should be good investments over time.
In the UK, we have plenty of businesses that have these attributes. Hargreaves Lansdown, Gamma Communications, and dotDigital are some that come to mind.
Why take a big risk on easyJet, IAG, or Cineworld shares when there are so many great companies you could invest in?
