If I had a lump sum of £3,000 to invest today, I’d buy IAG (LSE: IAG) shares. I’d invest this amount because I believe it’ll give me some exposure to the airline without taking on too much risk.
There are a couple of reasons why I would buy the stock today. For a start, I think the company looks cheap, compared to its potential. For its 2019 financial year, the British Airways owner reported a net profit of €1.7bn. If it can return to this level of profitability, the IAG share price is sitting at a prospective P/E of around 7.5.
However, just because a stock looks cheap isn’t necessarily a good reason to invest. Indeed, before investing any money in a cheap business, I think it’s always best to try and understand why the market has such a low opinion of the enterprise in the first place.
IAG share price headwinds
With IAG, I think it’s easy to understand why the market has been avoiding the business. For much of the past 12 months, the airline’s been grounded.
The firm has sold assets, raised debt, and issued new shares to keep the lights on. At one point, the group was selling everything but the kitchen sink to raise extra cash.
By taking evasive action, IAG has been able to avoid bankruptcy, for the time being. The good news is, it now seems as if the outlook for the global aviation industry is improving.
While holidays from the UK are still off the cards, overseas, the green shoots of growth are appearing. What’s more, there are initial indications that consumers are willing to spend more than they were before the pandemic.
The above implies the outlook for the IAG share price is looking up. That’s why I’d risk £3k on the stock today.
Risks and challenges
Having said all of the above, I should note that IAG still faces some severe headwinds. All investments carry risk, but I reckon IAG is particularly risky right now as the company faces an uncertain future.
Yes, green shoots are appearing, but there’s no guarantee customers will return to the skies when they’re allowed. Further, it could be years before some countries fully open their borders. IAG can’t do anything about these hurdles, and the firm may have to raise more money from its investors if the re-opening takes longer than expected.
Therefore, the IAG share price is, in my opinion, far riskier than most. It needs everything to go right over the next few months and years. Future setbacks could force the group to make tough decisions.
Overall, while I think IAG has potential as a recovery play, I’m also aware the firm faces some considerable challenges ahead. That’s why I’d buy the stock today, but limit my investment to just £3k.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
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