With vaccines roll-out continuing apace, many investors are now focusing on ‘reopening stocks’. Two such stocks UK investors have been piling into are easyJet (LSE: EZJ) and IAG (LSE: IAG).
I can see why these airline stocks are popular. Right now, there’s huge pent-up demand to travel. People are desperate to take a holiday. Having said that, these aren’t reopening stocks I’d buy myself. Below, I’ll explain why. I’ll also highlight some stocks I’d buy instead.
IAG and easyJet shares: risks remain
In the short term, I expect EasyJet and IAG to continue facing coronavirus challenges. While the UK is making excellent progress in the battle against Covid-19, many European countries are struggling to control the virus. France, for example, has just begun a new lockdown as it battles a third wave. I think there’s a real risk this summer could be a write-off for Europe-focused airlines. If it is, easyJet and IAG may have to raise more equity or issue more debt to survive.
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Meanwhile, I also have long-term concerns about these flyers. History shows that airline stocks are generally not good investments in the long run. A huge amount of capital is required to keep an airline running smoothly and there’s a lot that can go wrong. Fundsmith portfolio manager Terry Smith describes airlines as a “machine for losing money.” He says that airlines is a “truly awful sector” from an investment standpoint. Given his track record, I think he’s probably worth listening to.
So, while there’s clearly demand to fly, I’m leaving the airline stocks alone for now. The risks are too high for me.
Reopening stocks I would buy
Instead of investing in airlines, I’m focusing on reopening stocks that are also poised to benefit from long-term growth trends. My logic is that these companies could do well in the short term and the long term.
One example is Alphabet, the owner of Google and YouTube. It’s the largest online advertising company in the world. I think it has the potential to benefit from the reopening this year as businesses ramp up their ad spending.
It’s worth noting that travel ads make up over 10% of all ad spending on its platform. So, it could get a massive boost as travel companies increase their related spend. In the long run, the company looks set to benefit from the shift to digital advertising. This market is expected to triple between now and 2025.
I also think credit card companies such as Mastercard and Visa are well-placed to benefit from the reopening of the global economy. More activity means more transactions. And these companies will benefit from travel too as they generate a large proportion of revenues from cross-border payments. In the long term, the growth story here looks exciting – by 2030, nearly 3trn payments are set to move from cash to cards and electronic payments.
Of course, these kinds of reopening stocks aren’t without risk. Alphabet could face regulatory intervention. Meanwhile, MasterCard and Visa face competition from new FinTech start-ups. The three stocks I’ve mentioned all trade at relatively high valuations too, which adds risk.
However, I’m comfortable with these risks. Overall, I think these stocks are safer reopening plays than airlines such as IAG and easyJet.
