In 2024, the International Consolidated Airlines Group (LSE:IAG) stock went on a tear higher. It almost doubled in value over the calendar year, with the rally continuing in January.
However, the IAG share price has lost 11% in value over the past two weeks. Some investors might be concerned that the stock has peaked, with a more significant move lower pending.
The case for a further drop
Human investment psychology has been studied at length. One point that always comes out is the herd mentality of retail investors. What this means is that when a stock’s rising, everybody jumps on board, fuelling a more extensive move higher. Yet as soon as the stock starts to drop, investors all rush for the exit, causing a sharper fall than is really justified.
This could happen with IAG shares if enough of the retail crowd gets concerned that the stock could keep falling in the coming months. I’m not saying that investors should sell, but it’s hard to cut emotions out when the stock has surged in value over the past year and now is starting to fall.
When looking at company-specific factors, the release of annual results on 28 February could be part of the recent share price wobble. Some investors might be banking some profit ahead of the earnings, just in case some bad news gets released. For example, in the latest quarterly report, the business spoke of higher costs, higher wage bills, and supplier inflation. Should this continue, it could hamper profitability.
Why further gains could happen this year
It’s natural for a short-term correction in a stock to occur after such a sharp rally. Yet the IAG share price could keep progressing in 2025 based on a few factors.
From a valuation standpoint, it’s not overpriced. The price-to-earnings ratio (P/E) is 7.87. This is below the fair value benchmark of 10 that I use for comparison. So if anything, the stock is undervalued and therefore could keep rising as value buyers see the longer-term vision.
Improved financial results could fuel the stock to jump. This is especially true given the momentum that the company has at the moment. The Q3 results flagged that management “expect our strong financial performance to continue for the rest of the year”. The CEO commented that “demand remains strong across our airlines”.
Based on higher revenue and higher profitability, the share price should rise as investors continue to be optimistic about the outlook for 2025 and beyond.
What I’m doing
I bought IAG shares last month. I’m not looking to sell any time soon, even with the risk of the annual results upcoming. When I consider the valuation at present versus what I think it could be in another couple of years, I can afford to look past this short-term drop.
