Based on investment platform Hargreaves Lansdown‘s most popular buy list, engine-maker Rolls-Royce (LSE: RR), airline group IAG (LSE: IAG) and Lloyds Bank (LSE: LLOY) shares are in big demand. As someone looking to grow my wealth, am I missing a trick by not investing in these battered FTSE 100 stocks? Here’s my take.
FTSE 100 value stock?
Lloyds Bank was the third most bought stock last week, suggesting investors are finally becoming bullish on the company. There’s certainly some positive momentum in the price. In the last month, Lloyds shares are up 32%!
Value hunters would no doubt argue that the shares still look cheap, especially if analyst estimates on earnings bouncing by almost 150% next year prove accurate. Right now, Lloyds trades on a forecast P/E of 11.
Personally, I think this remains a risky pick. For one, there’s still a possibility that the government will be unable to strike an agreement with the EU. A no-deal Brexit could mean further pain for the British economy that’s already under severe pressure due to the coronavirus pandemic.
That’s seriously problematic for a company like Lloyds, given its dependence on grabbing business from UK customers. Factor in the risk of historically-low interest rates going even lower and it’s quite possible the recent recovery will prove temporary.
The banking sector may prove a bargain if none of the above comes to pass. But that’s not a gamble I’m prepared to take.
Patience required
Occupying second spot on the most popular UK buy list was Rolls-Royce. The FTSE 100 member has been a trader’s dream over recent months. After tumbling from 136p in July to just 39p in October, the shares have now recovered to change hands for 108p. But what happens next?
Clearly, the next few months will be pivotal. From an optimistic perspective, an end to travel restrictions in the West could see a huge rebound in earnings.
The problem with this scenario is that the latter will now be spread more thinly due to more Rolls shares being created following its £2bn rights issue. It also assumes travellers will rush back to the airports and business meetings via Zoom are ditched.
Investors content to stick around for years could make a lot of money on Rolls-Royce’s recovery. My concern is the opportunity cost of not getting involved in other highly promising stocks and trends in the meantime.
Risky business
Top of last week’s buy list was British Airways-owner International Consolidated Airlines. Like Rolls-Royce, it’s easy to see why. Buoyed by the vaccine news, the deeply indebted FTSE 100 airline’s share price has rocketed 77% in one month.
I don’t doubt IAG has the potential to make investors even more money from here. Even so, I don’t expect a smooth ride. Assuming they receive regulatory approval, getting the vaccines distributed is unlikely to be as simple as some believe it will be.
Whether IAG is a buy or not depends on each investor’s tolerance for risk. Like star fund manager Terry Smith, my strategy is to look for high-quality businesses with competitive advantages that can be held for years. Note that I haven’t mentioned anything about galloping share prices.
You pays your money, you takes your choice. IAG is not a business I want to own.
