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Rolls-Royce and IAG shares are being bought by Hargreaves Lansdown investors. Should I buy too?

Matthew Dumigan
·3-min read
Risk reward ratio / risk management concept
Risk reward ratio / risk management concept

It won’t come as news to you that a handful of British stocks are receiving a lot attention right now. In fact, on Monday, the two most traded stocks on the Hargreaves Lansdown investment platform were Rolls-Royce (LSE: RR) and International Consolidated Airlines Group (LSE: IAG).

The two companies’ share prices rose sharply at the beginning of the week and have performed well over the last month. As a matter of fact, it’s been a great month for the FTSE 100, which surged on the back of positive vaccine news.

With that in mind, I’m going to take a look at the investment case for these two companies in order to determine whether they could make for savvy investments.

Rolls-Royce: Light at the end of the tunnel?

It’s not difficult to see why the Rolls-Royce share price has tumbled in 2020. The impact of Covid-19 on businesses operations has been devastating. For example, the company relies heavily on a healthy aviation industry, which is a major source of revenue. As such, a substantial lack of customers ordering new engines and servicing current ones has been a major blow.

Combined with hefty fixed costs from equipment and storage, the lack of routine operations has decimated finances. What’s more, analysts expect a net loss of around £2.6bn this year.

That said, Rolls-Royce has taken steps to improve its financial outlook. For instance, the £2bn raised from a recent rights issue will provide some relief to the company’s balance sheet. Furthermore, with defence spending likely to remain robust, the group’s defence contracts could prove to be a lifesaver.

Ultimately, despite a vastly improved outlook, I’m not sure Rolls-Royce shares are a wise long-term investment. Don’t get me wrong, I think there’s definitely upside potential over the short term. Nevertheless, I’m wary of the damaging long-term impacts caused by Covid-19 that could leave the business sapped of its former glory.

IAG: Plenty of share price recovery potential

With the tourism industry in tatters thanks to international lockdowns and Covid-19 travel restrictions, you’d be forgiven for thinking airline stocks should be the last place to invest money. That said, thanks to a vastly improving outlook, I don’t think they should be automatically overlooked.

In my view, that’s particularly the case for companies such as IAG. The group, which owns British Airways and Iberia, watched its share price crash 70% in the wake of the coronavirus outbreak. Since then, despite a recent sharp rise, the shares still remain down by around 34% since the beginning of 2020.

Despite bleeding cash as a result of a vastly reduced operating capacity, IAG boasts a large capital reserve. Additionally, the company has just completed a rights issue, which provided significant liquidity. All eyes will now be on whether IAG can have a profitable summer in 2021, which to some extent depends on an improved coronavirus outlook.

Ultimately, the group remains in a far better position than many of its peers. Moreover, my gut feeling is that IAG could provide some serious long-term share price gains, provided the landscape continues to improve. As such, even at today’s valuation, I think the shares offer plenty of value for money.

The post Rolls-Royce and IAG shares are being bought by Hargreaves Lansdown investors. Should I buy too? appeared first on The Motley Fool UK.

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Matthew Dumigan owns shares of International Consolidated Airlines Group SA and Rolls-Royce. 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.

Motley Fool UK 2020