Idea of the Day IAG

Why: International Consolidated Airlines Group (IAG), the parent company of British Airways, has managed to recover from Tuesday’s earlier losses that were caused by British Airways’ weekend of flight chaos. The sell off was short and sweet, suggesting that investors are willing to show mercy to BA for its systems failure and buy back the stock on any dips. This is a positive sign for the bulls, and suggests that there could be further upside to come. The question is, when, or if, that will happen.

How: Before the chaos that emanated from Heathrow and had severe repercussions for flight travel across the globe, IAG (the London listed stock) was trading close to its highest level since 2015 around 620, and had broken above the critical 600 level. We would point out that 630, is a key level of resistance, and buyers refused to push it above this level 2 years’ ago. However, the uptrend of the past year looks strong, so the market may try to test this level once again.

The other reason why traders may have picked up this stock on Tuesday’s dips is it’s trading fundamentals. The Price-to Earnings ratio is 7.5 times trailing 12-month earnings per share, which looks cheap compared to the overall market: the FTSE 100 has a P/E of over 30, while the Eurostoxx 50 index has a P/E close to 20.

Added to this, in the past month, the stock has gained by 6.7%, which is significantly lower than some of its peers, and may suggest that there could be further upside for IAG, even with IT system glitches priced in. Thus, the IAG catch-up story is fairly compelling, and investors seem to like buying this stock on the dip.

Price analysis: In the past year, IAG has fallen by more than 2% on 15 occasions, this tended to lead to a smaller fall the following day of 0.6%, according to Bloomberg analysis. Thus, we can’t rule out a further decline in the coming days, however, we continue to think that any downside could be used as a buying opportunity. Key support lies at today’s low at 586.50; a break below here would be a bearish development and suggest further losses are likely.

What’s next? If IAG does manage to break back above the 600 mark, then 630 will become the glaring target. If it manages to break above this level then it would be a very bullish signal that would open the way for a move back to 650. However, beware of selling pressure at this level, and we could see profit taking around the 627-630 mark.

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