It’s important to look forward when seeking stocks to buy. At the same time, there’s merit in taking a look back at 2020 and seeing if any opportunities are already there. One way to do this is to review some of the worst-performing FTSE 100 stocks of 2020. In some cases, these could represent attractive buys right now. Fear can lead to share prices being undervalued and buying stocks at a low level relative to their historical prices can offer larger returns.
The 3 ‘duds’ last year
Starting at the very bottom, the wooden spoon went to the International Consolidated Airlines Group (IAG). The share price fell 62% in 2020, making it the worst performer. Second from bottom was Rolls-Royce Holdings (LSE:RR), down 53%. This was followed by BP, down 46%.
Unsurprisingly, the companies here all reflected the negative developments for their respective industries in 2020. IAG is a proxy for the airline sector. The lockdown of people around the globe in order to stop the spread of Covid-19 started in Q1 and lasted (to some extent) through to the end of the year. This meant that ‘flying miles’ were reduced substantially. Passenger traffic in Q3 was reported to be 88% lower than the same period last year. The knock-on impact of this was lower revenue, and ultimately a falling share price.
Another industry hit in 2020 was oil. BP is one of the largest oil companies in the world, and works from the exploration stage right through to distribution. It has 1,200 service stations here in the UK alone. Due to the fall in oil prices in 2020, investors expressed their concerns by selling stock in BP. The benchmark West Texas Intermediate (WTI) oil started the year priced around $63, but went into unprecedented negative territory in April, before closing the year around $48.
Rolls-Royce, a bargain buy?
The Rolls-Royce share price was one of the worst performing FTSE 100 stocks due to the connections with the airline sector. The maintenance and sale of engines in civil aerospace decreased in 2020. The business is diversified though, with the defence arm of the company helping to counterbalance other divisions. In a trading update last month, Rolls-Royce said its 2021 forecast sales are well covered in the defence division. For example, it has taken on recent orders for 56 engines from the German Air Force.
Aside from good diversification, the reason I think Rolls-Royce could be a bargain buy is due to the financial resilience being shown by the group. The strength of its overall offer enabled it to raise around £2bn last year from debt and equity markets. Management was aiming to cut costs by £1bn by the end of last year. 2020 year-end debt of around £2bn is large, but the business has liquidity of around £9bn.
So overall, I think Rolls-Royce is heading into 2021 in a strong position. I don’t think it has been fully appreciated by investors in the wider market, as the current share price shows. As I wrote recently, I think the share price could head back towards 200p by the end of this year. This would represent around an 80% rise from current levels.
