Forget easyJet and IAG shares. I’d buy these ‘reopening’ stocks

With vaccines being rolled out, investors have been piling into IAG and easyJet shares. But Ed Sheldon believes there are better reopening stocks to buy.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Alphabet and MasterCard and has a position in Fundsmith. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Mastercard, and Visa. 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.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »