With the Stocks and Shares ISA contribution deadline on 5 April looming large in investors’ minds, those looking to add a growth stock to a portfolio soon should consider International Consolidated Airlines Group (LSE: IAG).
What makes me say that given that I wouldn’t describe the British Airways owner as a low-risk stock? In truth, it’s hard to call any airline low risk these days. We live in an uncertain world, where geopolitics, economic shocks and unexpected events can rattle markets at any time. Recent experience suggests airlines are often first in line to take a hit.
They carry huge fixed costs, operating vast fleets of aircraft and employing tens of thousands of staff. IAG, which also owns Aer Lingus, Iberia and Vueling, employs around 75,000 people, flies to 285 destinations, operates more than 600 aircraft and carries over 122m passengers a year.
Exciting blue-chip share
The group is exposed to a wide range of shocks. Rising oil prices push up fuel costs. Air traffic control strikes can disrupt schedules and dent revenues. Delays can trigger compensation claims. Extreme weather and natural disasters can ground flights. And, of course, geopolitical tensions can hit demand overnight. All are beyond management control.
We’re seeing that in the Middle East today, with British Airways suspending flights to Dubai. And that’s before even mentioning the pandemic, which IAG only survived by taking on significant debt and launching a major rights issue.
More recently, markets were shaken by Donald Trump’s so-called Liberation Day tariffs. When they were announced in April last year, global shares plunged, and IAG fell faster than most. When the tariffs were lifted just one week later, I took the opportunity to buy, and quickly found myself sitting on a 70% gain.
IAG was particularly exposed because its profitable transatlantic routes looked vulnerable, with fewer business travellers expected to cross the Atlantic. Yet, as so often, the shares bounced back strongly.
We’re seeing a similar pattern today (1 April). The FTSE 100 was up 1.75% this morning on hopes that the Iran conflict may ease. Whether that optimism proves justified remains unclear. In my view, a meaningful peace deal still looks challenging.
Either way, IAG is leading the charge, rising 5.8% so far. The shares are up 35% over a year, and 95% over two years. But if tensions escalate, IAG is likely to fall faster than most stocks.
Dirt cheap but volatile
Today, the shares look cheap, trading on a price-to-earnings ratio of just 6.8, one of the lowest P/Es in the FTSE 100. I don’t expect that multiple to climb anywhere near the index average of around 17 though. Investors typically demand a discount for stocks with this level of uncertainty. Even so, I see this as an exciting long-term opportunity. Airlines are highly cyclical, and history suggests the best time to buy is when sentiment is weak and prices are under pressure.
Investors should approach with caution, given the stock’s volatile nature. But for those with a long-term outlook and a tolerance for bumps along the way, I think it’s worth considering today. For anyone who finds that level of risk uncomfortable, there are plenty of other FTSE 100 bargains to explore right now.
