International Consolidated Airlines Group’s (LSE:IAG) stock has doubled in value over the past six months. And boy, does that kind of move for IAG shares make me happy.
It’s been my number-one pick in the sector for some time and I’m delighted to see the stock outperform the market. So £5,000 invested in IAG six months ago would now be worth a little over £10,000.
What’s behind the rise?
The IAG share price has surged 100.7% over six months due to a combination of strong operational performance and strategic decisions. Management’s focus on transatlantic routes is part of the reasons the company has yielded record profits, capitalising on rebounding global travel demand.
IAG’s success in repaying debts, reinstating dividends, and announcing a €350m shareholder buyback programme has also demonstrated financial stability — which was questioned during the pandemic — and boosted investor confidence.
Moreover, the FTSE 100 stock was significantly undervalued, trading at just 4 times forward earnings. That made it very cheap compared with the likes of Ryanair, which was around 13 times. In short, improving sentiment, with investors buoyed by strong results and forecasts, has allowed IAG to start making up this valuation gap.
Still room for growth
Analysts still see room for growth in the IAG share price. The stock’s currently trading with a 10% discount to the average share price target, but the consensus target’s risen continually with the share price. That’s a good sign that analysts believe the company’s fortunes will continue to improve.
In fact, there are currently nine Buy ratings, four Outperform, and four Hold ratings. And this reflects a very positive outlook from the analyst community. This is reinforced by many institutions, including JP Morgan, suggesting IAG was indeed the best pick in the sector.
What’s more, and it’s something I believe is often overlooked, IAG offers a fairly unique degree of diversification, thanks to its business model. The British Airways, Aer Lingus, and Iberia operator has a variety of class offerings, catering to leisure and business travel as well as long- and short-haul. This means it’s hedged, to some degree, against falling demand in one of its categories.
Staying diversified
While I’m still bullish on IAG, noting among other things that the stock remains down 23% over five years despite earnings broadly recovering, airlines can be a tricky market segment. For one, it’s typically quite cyclical with historical data suggesting demand suffers during periods of economic decline. Moreover, we’ve also seen that disease outbreaks, be they epidemics or pandemics, can place airlines in existential crises. A slower UK economy, combined with additional National Insurance contributions, may also hurt earnings.
With this in mind, investors should try to remain diversified even if one stock looks like a clear multibagger. Over-concentration in a single asset can amplify risk, particularly in the face of market volatility or unforeseen company-specific challenges.
As such, with my IAG stock up close to 150%, I‘ve been thinking hard about buying more. But concentration risk within my own portfolio may prevent me from doing so.
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JPMorgan Chase is an advertising partner of Motley Fool Money. James Fox has positions in International Consolidated Airlines Group. 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.
