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FTSE 100 rally: Here’s why I think easyJet and IAG are still bargain buys

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Share prices of FTSE 100 aviation stocks easyJet (LSE: EZJ) and International Consolidated Airlines Group (LSE: IAG) have been among the worst hit in the stock market crash. It’s obvious why. The lockdown brought their operations to a standstill. But as lockdowns are eased and news of flights resuming trickles in, their share prices have picked up. It helps that the FTSE 100 rally is underway as well. 

As a long-term investor, I’m now interested in knowing this: How much of the improvement in share prices is driven by momentum provided by the FTSE 100 rally and how much is because of a change in outlook for their business? I want to know this because momentum can carry stock prices forward only so much. A single shock to the index could result in another crash in these shares prices. 

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Share prices rise on FTSE 100 rally

Going by the sharp gains in their share prices since the last week of May, in sync with the FTSE 100 rally, it’s clear as daylight that at least some of their performance is driven by momentum. However, I think that only accounts for some of the improvement. A few days ago, the rating agency Moody’s downgraded its credit ratings for both companies. This suggests that at least in the agency’s assessment, the companies’ debt is now poorer quality than earlier. 

Share prices of both EZJ and IAG reacted negatively to the news, resulting in sharp falls. EZJ’s share price fell by 8%, while IAG’s fell by 7%. However, investors appear to have decided to brush off the news. Both shares have resumed their sharp upward journeys since. This, suggests to me that there’s genuine value percieved in the stocks. 

Room for optimism

I for one, was (cautiously) bullish on the easyJet stock even before the FTSE 100 rally started. Its prickliest issues seem to be getting resolved, slowly but surely. Its financial health is still a big question mark, of course. I reckon that even with restrictions lifted, the number of people travelling will still remain relatively low. It’s only once the danger of contracting Covid-19 has all but passed and the recession is over, that the world really return to normal. Some say it could take up to a year to do so. But, over the longer term, I reckon that odds are more in its favour than not. 

I think a similar story will play out for IAG, the owner of British Airways. In fact, I would say that at least from the share price perspective, it has more potential for an increase. EZJ’s share price is still 42% below the highest levels seen in 2020. But, for IAG the number is a higher 53%. It may take some time before the shares reach these levels. It might even take a long time. But I’m optimistic, FTSE 100 rally or not.  

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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