One of my most recent additions to my portfolio is easyJet (LSE: EZJ) shares. The low-cost airline looked like a low-cost valuation – a price-to-earnings ratio below 10 is always worth paying attention to. It seemed to me that the negativity around the sector following the pandemic was a little overdone too. The stock seemed undervalued to me.
You can imagine my chagrin when a certain orange-coloured individual decided more war was needed in the Middle East. The awful humanitarian consequences of the Iran war are the worst part, of course. But it’s having ripple effects on businesses and economies and not all of the negative effects have been felt yet. Among the early losers have been airline stocks, just like the one I bought recently!
Cheap buying opportunity?
Following the start of the conflict on 28 February, the easyJet share price fell 27% in just over a month. The FTSE 100 only fell 9% over the same timeframe, which shows just how much more affected the airline was.
So what’s going on here? Incredible buying opportunity for an already cheap-looking stock? Perhaps…
For one, things might be turning around. The share price is actually up over 10% since the start of April. A £10,000 stake would have turned into £11,083 in double-quick time. More good news regarding the conclusion of this conflict and that could just be the start of things.
And the falling share price has pushed the valuation down to levels almost unheard of. The current price-to-earnings ratio of 5.88 is almost as cheap as it gets on the FTSE 100. It’s very rare for a figure to stay that low for long.
My decision
Are there risks? Absolutely. Even if the Iran conflict gets wrapped up soon (hopefully) there will be lingering consequences. The price of oil is not likely to fall back down to previous levels. Jet fuel is one of the biggest considerations for the margins of airlines.
The conflict is having an effect on consumer behaviour too. In the early stages of the war, folks were booking flights closer to home rather than far-flung destinations – remember the Middle East is a travel hub for those wishing to visit Asia and Australasia. The latest news suggests people are opting for holidays in the UK rather than going abroad too. Lower demand for flights is bad for any airline, but especially low-cost ones like easyJet that operate on wafer-thin margins and high volume.
My decision? I have no intention to sell, and believe this could be a stock worth considering for the right investor. I will say that it’s one of the riskier elements of my portfolio due to the ongoing nature of global events. Some may wish to steer clear for those reasons.
