The easyJet (LSE: EZJ) share price has soared over 70% since early November following news on coronavirus vaccines and the possibility that air travel will get back on track in 2021.
Is this now a home run for investors? I’m not so sure.
Priced in?
Having been so battered in 2020, the tilt to value stocks — particularly those operating in the travel and leisure space — makes sense. The question, however, is whether the recent good news is now priced-in.
I think it might be. Even if air travel does rebound in 2021 as the market expects it to, easyJet will still face the same level of competition for passengers it did before the coronavirus reared its ugly head.
In the meantime, there’s a truckload of debt on its balance sheet to sort out. Tellingly, directors aren’t among those buying the shares either. This suggests they aren’t wholly confident about recent gains sticking.
There’s also Brexit to think about. As I type, Boris Johnson is on his way to Brussels in a last-ditch attempt to strike a deal with his EU counterparts. The fact that negotiations are even still continuing is arguably encouraging, but I certainly wouldn’t want to gamble my money on a positive outcome. Even if an agreement is reached, only the most optimistic of investors would presume there won’t be further hurdles ahead.
All told, I think the easyJet share price could still see some volatility in the near term. That’s why, right now, I’m buying the shares of a different FTSE 250 company: polymer provider Victrex (LSE: VCT)
“Significant headwinds”
Like the Luton-based airline, the coronavirus hasn’t been kind to Victrex. Today’s full-year numbers give some indication of the damage done.
Sales volumes and revenue declined 7% and 10% respectively over the 12 months to the end of September thanks to “significant Covid-19 headwinds in H2″ having a “material impact” on the business.
Unsurprisingly, this has filtered down to Victrex’s bottom line. Reported pre-tax profit tumbled to £63.5m — 39% lower than the previous year.
It doesn’t look like trading will bounce back soon either. Today, Victrex said that “overall performance remains subdued” thanks to end-markets such as Aerospace and Energy continuing to be weak.
Buying opportunity
Based on today’s muted reaction, it would seem that none of this is a surprise to the market.
In contrast to the easyJet share price, Victrex’s valuation was down slightly in early trading. This suggests to me that now might be time to load up. But I think there are other reasons to be optimistic.
For one, its finances look strong enough to withstand this problematic period. The FTSE 250 firm had £73.1m in cash at the end of the last financial year.
The reinstatement of dividends — a final payout of 46.14p per share will now be paid — is another positive. I doubt management would be making this decision unless it was confident about trading picking up in 2021.
Third, Victrex continues to invest in growth opportunities, including a new manufacturing facility in China. On top of this, you have the traditional hallmarks of a quality company: high margins, high returns on capital employed, and a market-leading position.
The easyJet share price has done well over recent weeks but, like Terry Smith, I’m more interested in what happens to valuations over decades. Victrex remains a better buy-and-hold pick for me.
