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Should you buy these top FTSE 100 rising shares?

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According to the search facility on the Hargreaves Lansdown website, the top two FTSE 100 rising shares yesterday were International Consolidated Airlines (LSE: IAG) and Compass (LSE: CPG).

Those two beat the rises of all the other constituents of the index on a good day for the stock market with many shares going up. Does their strength lead us to areas worthy of research with a view to buying some of those companies’ shares? Maybe. Here’s what I think.

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Top FTSE 100 rising shares in a challenged sector

It’s no secret that the airline industry has suffered a massive blow from the coronavirus crisis. So uncertain is the future for airlines that even Warren Buffett dumped his airline stocks when the crisis hit. And he’s well known for buying shares in companies when temporary challenges have knocked them down. 

Indeed, Buffett’s selling suggests he suspects the problems for airline companies may prove to be enduring rather than temporary. That said, he’s on record as saying he simply doesn’t know what will happen next for such businesses. And if we entertain buying a share such as International Consolidated Airlines, we’re making a contrarian investment.

But is hoping for a recovery in the business a good strategy? Perhaps. But it could be risky. IAG said in May it doesn’t expect the level of passenger demand in 2019 to recover before 2023. Meanwhile, the directors are pursuing restructuring and staff redundancy programmes. This isn’t surprising given the pandemic grounded around 94% of the aircraft fleet in late March.

I think this is one of those situations where shareholders could do well, or they could lose almost everything. Time will tell.

Everything changed

According to chief executive Dominic Blakemore in May, Covid-19 “changed everything” for foodservice operator Compass. When lockdowns hit revenue, Compass raised around £2bn on the stock market to “reduce leverage and increase liquidity.”

Blakemore reckons that despite “significant” short-term challenges, the company is now “well-placed to succeed in a post-Covid-19 world.” And to me, it makes sense for the share price to rise as economies begin to operate again and demand for the services offered by the company rebuilds.

City analysts following the firm are optimistic. They’ve pencilled in a triple-digit percentage rebound in earnings for the next trading year to September 2021. But with the shares near 1,184p, the forward-looking earnings multiple sits just below 24 for that year. I think the valuation is rich. However, I’d prefer to own Compass shares for the long haul over those of International Consolidated Airlines.

These two stocks have been buoyant lately. But much of the upwards movement could be due to investor speculation rather than because of compelling underlying business fundamentals. I believe there are better stocks to own in the FTSE 100 right now.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Compass Group. 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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