The IAG (LSE: IAG) share price jumped last week after news emerged that a possible vaccine for Covid-19 may be available before the end of the year. This is potentially positive news for the airline sector. However, I think this could be an excellent opportunity to sell, not buy, the stock. Today, I’m going to explain why.
IAG share price problems
Over the past few months, it’s become clear IAG’s problems won’t be short-lived. At the beginning of the pandemic, the company was confident it had enough liquidity to last the crisis. This hasn’t proven to be correct. The airline group has had to raise billions from investors over the past few months to stay afloat.
While a vaccine will help the sector’s recovery get off the ground, it won’t be a magic cure. It could be ages before airlines see a return to 2019 levels of activity. That means the company could be facing years of depressed profits. This would weigh on the IAG share price.
In my view, the outlook for the stock is shrouded in uncertainty. IAG may be able to stage a recovery in the next few years, but this isn’t guaranteed. The firm could continue to struggle.
That’s why I’d avoid the IAG share price. I reckon there are plenty of other companies on the market with brighter prospects.
One alternative is Softcat (LSE: SCT). The two companies could not be more different. IAG is an airline group that is facing momentous challenges. Meanwhile, Softcat is an IT infrastructure corporation which is seeing the demand for its services explode.
Shares in Softcat have outperformed the IAG share price by 66% in 2020. I think that clearly shows investors believe the former’s long-term prospects are much brighter. And I’m inclined to agree. The demand for IT and related services is only expanding. This trend will likely continue for many decades as the world’s tech industry grows.
On the other hand, the airline sector is facing overcapacity, higher costs, environmental challenges, and potentially years of lower demand. Demand should recover in the long run, but the other challenges will remain. High costs and empty seats have always been an issue for the airline sector. That won’t change after Covid-19. Countless carriers have failed because they’ve been unable to compete in the market.
Softcat doesn’t have these issues. The firm is a leader in its sector, has a cash-rich balance sheet, and can set its own profit margins. I believe these qualities, coupled with the tech sector’s growth tailwinds, should help the company continue to outperform the IAG share price in the long term. That’s why I’d rather own this growth star over the struggling airline group for the next few years.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Softcat. 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.