Questor24 Dec 2023 07:57
This tip has not gone to plan but it will come good in the end. Keep buying
Questor share tip: the company’s improving financial position means it remains a worthwhile purchase
Robert Stephens
20 December 2023 • 6:00am
In the investment world, no plan survives first contact with reality. Even the most experienced investors who conduct exhaustive research before buying a stock cannot foresee every future problem.
For example, no investor predicted the scale or timing of the pandemic. As we know, it had a huge impact on every investment portfolio across the world.
One result of this fact is that investors must decide whether to persevere with existing positions that have not performed as expected or sell them in favour of new opportunities.
In Questor’s view, focusing on whether a company has the financial strength to survive short-term challenges and judging whether its long-term potential remains intact are key to making the right decision.
For instance, our recommendation to purchase IAG, the owner of British Airways, in February 2021 has not gone to plan. We expected a strong and sustained economic recovery from the pandemic that would prompt bullish investor sentiment and a rising share price.
We also envisaged a buoyant consumer environment as savings amassed during lockdowns were spent. Clearly, we were wrong.
While the pandemic has abated, inflation rose from 0.4pc at the time of our tip to a 41-year high of 11.1pc within just 20 months. Its surge prompted interest rates to soar from a record low of 0.1pc to a 15-year high of 5.25pc.
Rampant inflation and hawkish monetary policy have acted as a drag on the economy’s performance, weighed on investor sentiment and contributed to a cost-of-living crisis.
While IAG has survived in this tough environment, its share price performance has been hugely disappointing. Despite an initial rise, it has ultimately declined by 4pc and lagged the FTSE 100 index by 18 percentage points since our recommendation.
The company’s latest quarterly update showed that its financial position was improving. During the third quarter it reduced gross debt by €2.4bn (£1.9bn) to €17.2bn. Net debt now stands at €8bn, having fallen by 28pc over the past year, while net finance costs were covered more than five times by operating profits in the first nine months of the year.
With total funds available amounting to €13.7bn, the company is well placed to survive ongoing economic difficulties to deliver on its long-term potential.
Encouragingly, its long-term outlook is relatively unchanged from the time of our initial tip. Demand for air travel is still widely expected to grow significantly over the coming years; the International Air
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