Investor interest in International Consolidated Airlines (LSE: IAG) shares is high right now. Indeed, last week IAG – which is the owner of British Airways – was one of the most bought stocks on the Hargreaves Lansdown platform. It seems the recent share price fall is attracting value hunters.
Should you follow the crowd and buy IAG shares for your own portfolio? In my view, no. I think that could be a mistake. Here, I’ll highlight one key reason I wouldn’t touch IAG shares right now.
IAG shares: a red flag
One red flag for me in relation to IAG shares is that ‘short interest’ is high at the moment.
Short interest refers to the percentage of the company’s shares that are currently being shorted. When a stock is shorted by an investor, the investor is betting that its share price will fall. Those who short stocks are usually hedge funds or very sophisticated investors.
Looking at IAG, data from the Financial Conduct Authority (FCA) reveals that seven funds are shorting IAG shares at present. Overall, the airline stock has short interest of 6.3%. That’s a substantial level and shouldn’t be ignored. It suggests there could be risk to the downside.
Don’t bet against the shorters
Shorters don’t always get it right. Sometimes, a heavily-shorted stock rebounds and the shorters get burnt. This is what has happened with Tesla stock recently.
Yet quite often, the shorters do get it right. Some heavily shorted UK stocks in recent years include Carillion, Debenhams, and Thomas Cook. All three of these stocks were completely wiped out.
I’ll point out that IAG isn’t the most shorted UK stock right now. That accolade goes to Hammerson, which has an alarmingly high short interest of 22.9% at present. Cineworld is in second place with 8.5% short interest. IAG is in the top 10 most shorted UK stocks, though. To my mind, that’s a signal that investors should steer clear.
Fighting for survival
Why are hedge funds betting that IAG’s share price will fall? It all comes down to the uncertainty that airlines face due to Covid-19. Ultimately, until we see mass vaccination for the coronavirus, life is going to be very tough for the airlines. Recent flight data shows that the recovery in European air travel has gone into reverse.
“This is the worst crisis that British Airways has gone through in its 100 years of history,” said British Airways CEO Alex Cruz recently. “We’re still fighting for our own survival. We are taking every measure possible to make sure we can actually make it through this winter. We do not see a short-term coming back of our passengers. All the feedback we get … is still pointing at a slow recovery process.“
Meanwhile, former IAG boss Willie Walsh recently warned that the next few months are likely to be “very, very tough” for airlines. Walsh added that the airline industry is “never going to get back to the way it was.”
Better stocks to buy than IAG
Given the high level of short interest and the uncertainty related to Covid-19, I see IAG shares as a risky investment at the moment. I think there are much better stocks to buy right now.
Edward Sheldon owns shares of Hargreaves Lansdown. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended Hargreaves Lansdown. 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.