Fundamentally Furloughed

It would be better if you added a column after start date with something like ‘days since recommendation’ to make it clearer how long the change has taken etc.

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Nice idea, added it now!

Doesn’t make me look as bad now :tada:

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Nice work.

Give it a couple of months for the covid nonsense to work itself out a bit more and I’m sure it will look a bit different.

As for AML, I’d have a sell rating given how often they go bust…

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Hi Jack,
Loving the transparency.
Can you explain the Direction column and how you have worked it out?
Pete

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NVM, I think I figured it out- your “recommendation” essentially (at the time). Not necessarily what you have done.

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NextEra Energy (NEE) - The largest generator of wind and solar energy

I wanted to take a look at an interesting renewable energy company which I wouldn’t normally judge. While looking through the sector NextEra stood out as been unique with a story behind them.

next logo

Who Are NextEra?

This is a trickier question than normal. If you search and try and invest in NextEra you’ll see there are two companies with a similar name, and similar logo. They have a link but they are two independent firms.

NextEra Energy (NEE), who I want to talk about today, owns two electric companies. Florida Power & Light Company serves more than five million customers. This makes them the biggest regulated electric utility provider in the USA! Measured by retail only that is. The second company is Gulf Power Company which operates in eight counties, serving 460 thousand customers. Finally, NextEra Energy also is an energy company in its own right and is the largest generator of renewable energy from wind and sun! As well as being in the battery storage game as well.

Hopefully, like me, this has got your attention as to what they can become and how they can expand.

The other company, NextEra Energy Partners (NEP), is a partnership between itself and NextEra Energy. This separate company focuses on acquiring, managing, and owning clean energy projects and sites for the long term. This means that NextEra Energy can build a new site, get the technology and set up in place, secure a long term energy contract, then sell the whole project to NextEra Energy Partners for instant cash or to aid with cash flow. It does mean NextEra Energy Partners can also create partnerships on projects with multiple businesses and manage them separately from NextEra Energy directly.

While both companies you can invest in, depending on what kinds of exposures you like, I will focus in on NextEra Energy as that is where the R&D and energy generation are happening, rather than going through the partners’ route.


Source: NextEra Energy FY 2019 Report

What Does NextEra Do?

I should start by saying this “clean energy” company is not exclusively green. Gulf Power Company is not exclusively green. If we look at the different business lines when it comes to the revenue we get a clearer picture of what NextEra truly does. As this is the combination of multiple companies and different partnerships what they do runs a lot deeper than their company statement.

The last annual report doesn’t include a clean here is where our money comes from across all our businesses, meaning we have to mash this data together ourselves to figure out what they truly do.


Source: NextEra Energy FY 2019 Report

FPL relies upon a mix of fuel sources for its generation facilities, some facilities can operate on both natural gas and oil, and on purchased power to maintain the flexibility to achieve a more economical fuel mix. This is the strategy here for making Florida Power more “eco”.

next neer
Source: NextEra Energy FY 2019 Report

NEER sells products associated with its generation facilities (energy, capacity, renewable energy credits (RECs) and ancillary services) in competitive markets in regions where those facilities are located. They have a broader remit and get involved in infrastructure and transmission across the US.

Gulf Power was finally acquired and moved over at the start of 2019. This isn’t an eco company at all, and they are working to transition this business to move over to renewables.


Source: NextEra Energy FY 2019 Report

As mentioned, this is the oddest “renewable” energy company I’ve come across, because they don’t appear to be that renewable. It’s a sprawling US-focused energy company with a heavy preference for renewable wind and solar, but that doesn’t limit them.

In terms of how NextEra generates its power, you can expect it to come from a mix of solar, wind, natural gas, coal, nuclear, and oil. However, they have some additional revenue lines, as NextEra is in the business of selling the electricity they also have a trading division. Meaning they not only sell directly to end retail consumers (a few institutional contracts as well) but they also squeeze the margins but using a mix of buying in energy cheaply while also selling their excess. This level of operations is only possible with the scale of NextEra and their scope as an overall business.

Does NextEra Make Money?

Is this a profitable business, the energy sector can be tough, and anyone chasing the renewable energy industry, in particular, can end up being cash burning and supported only by grants and green bonds.


Source: Genuine Impact

A first glance comparing NextEra against the market doesn’t look very promising. I want to know more than just a market comparison though, I want to see the actual numbers past and present. We know they have been acquiring new businesses, and they have a busy pipeline of reinvestment into their new sites, what does that mean for the profitability.

To start us off, NextEra generated $19.2bn in revenue in 2019, $4.6bn in the first quarter of 2020 as well. It’s great to bring in money, but how are they converting this? Back to the annual statements for this. NextEra is running a gross margin of 58.33%, which represents a high cost of revenue. For the energy sector, and renewables especially, this is pretty strong, this isn’t a number I expected to be above 30-40%. Recently I looked at a solar company who’s gross margin was negative, so this is a relief.

Energy companies also love to reinvest into R&D, and in this case, as we are selling directly to customers we can expect a higher than normal marketing budget. I was very impressed to see a very comfortable 19.63% profit margin. In 2018 this was 39.68% but we had less investment and financing activity that year.

So far this mutt of an energy company is showing the right signals, the next pitfall is the debt. With expensive sites and fixed long term contracts, the assets can be extremely high, which tends to encourage borrowing beyond their means.


Source: Wallmine

For me, this is another tick mark. Even with $117.7bn in assets, the debt to assets is a comfortable 64.86%. Looking at the near term (back to quarterly statements!) The current liabilities are sitting at $13.7bn, but we have a problem. The current assets (cash, net receivables, and inventory) are only worth $9.7bn. Given the operational income for the most recent 2020 quarter was only $1.98bn we have a shortfall to think about.

The quarterly interest expense has shot up recently as NextEra takes on more financing. $1.3bn came out in Q1 2020, compared to $0.2bn in Q4 2019 and $0.7bn Q3 2019. While the long term picture isn’t anything to panic about, this short term increasing debt while they are seeing the economy come under pressure is an unwelcome situation.

There is one last aspect of the financials I want to look into. How can I as an investor make money? Thankfully we have a dividend to look at. Due to the recent share price dive, and the darkening financial situation in the short term the dividend yield is a very weak 2.06%.

That 2% yield, however, represents a 73% payout ratio. Meaning if we can see increasing dividend growth and have confidence in the recovery, then there is a lot of long term love to be found here.


Source: Wallmine

It’s not often you come across a company with dividend growth for 24 years with no breaks. A quarterly dividend, with a strong track record, creates a lot of pressure on management to protect this for shareholders. The negative is this can cause short term decisions to create a booster quarter for shareholders and passing the issues onto the next quarter.

The historic growth plus a fairly stable management team gives me the impression passing the buck onto the coming quarter is not something they do (commonly enough to be an issue at least!)

Is NextEra Cheap To Buy?

No. I don’t think this will come as a surprise. For the most part, they have a solid balance sheet, they have a strong history, while the company is structured in a way that means you need six Bloomberg screens just to find a single revenue line, it’s not new knowledge that NextEra exists and the market has been watching.


Source: Google Finance

We have the classic COVID-19 dip we have seen across the market, however, the recovery hasn’t been as strong as other companies even within the energy sector.

With the retail focus leaning heavily on their balance sheet, and Americans faced with a lot of economic issues in the immediate term, investors have reassessed the price a bit more cautiously.

Even now we can see a P/E ratio of 34.21x, price to sales of 6.46x, and a price to book of 3.45x. In the defence of NextEra, we do have a book to share ratio of 72.10x, however, this is not uncommon when you have assets that are functional sites that are bundled with long term energy contracts.

Some other interesting facts which might explain why some investors have taken a moment to raise their eyebrows is internal ownership. Only 0.18% of the shares are held by directors and the institutional ownership sits at 81.04%. Remember that complex structure? NextEra Energy Partners owns the lions share here.

NextEra Energy is selling a lot of directors sells recently but if you peek at NextEra Energy Partners you’ll see similar directors all buying. While the timings are off, and I expect some are locking in some profits, the heavy sell activity is only telling part of the story due to the company structure. That said this confusing relationship and setup will be offputting against other investments where ownership and responsibility is a bit more clear cut.

What Does The Future Hold For NextEra?

As my crystal ball has been broken for some time now, and I’m pretty sure it was defective anyway (thanks Beyond Meat) I’ll have to depend on the far more educated professional sell-side analysts.


Source: Genuine Impact

In terms of the future share price growth, the average prediction for the coming year is a $10~ per share increase, a 3.23% increase. If you are a big-time momentum hunter there are much more volatile and high growth energy firms out there. The dividend will be causing a drag on the share price. The long term plan is the regular and reliable dividend payments than selling off at peaks.

The other aspect to consider is the revenue and EPS predictions, which are both pretty punchy for NextEra. Looking at the annual statements again, NextEra has a pretty rubbish record of beating expectations, they come very close but have trouble sealing the deal.

With a poor track record of meeting analyst expectations and slow growth, is the dividend and green future enough to secure your interest?


Source: Genuine Impact

According to the analysts, it should be! With 18 analysts keeping tabs on what is happening at NextEra (and no doubt fighting the company structure to come up with any conclusion) they are leaning towards a buy. Currently, we are in the overweight zone in terms of sentiment, which is an encouraging future if you are looking for a longer-term investment.

NextEra Energy Executive Summary

  • A strong balance sheet with big revenues and excellent profitability
  • Watch out for the short term this year debt, we might have some problems in the near term due to financing and COVID-19
  • The dividend has grown for over 20 years, pays quarterly and over 70% of the income is being paid out
  • This is expensive to buy right now as it’s not an unknown stock and the short term debt means it might get cheaper short term
  • Analysts are liking what they see, share price growth is barely beating inflation but the dividend is the crown jewel here
  • Not strictly “green energy” but a bit part of their business, if you want pure renewables you’ll have to skip NextEra for now

Thanks for reading! I hope you have enjoyed learning about NextEra as much as I’ve enjoyed writing and researching them.

Please let me know your thoughts, is NextEra something you are interested in or are there other energy firms you prefer? I’ve tried changing up how I’ve written this. If you prefer a different style let me know!

Stay safe and enjoy the weekend!

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Dividing the executive summary between “pro’s and con’s”?

Additionally- my background is Counselling and Pyschotherapy. We do a lot of on “confirmation bias”, which often comes up in Investing too… I have noted from the 29+ companies you have scrutinized, you have 15 buys, 12 holds and only 2 sells. Could you be suffering from confirmation bias? It would be useful to know if you have shares in researched companies yourself?

Could also be confirmation bias if your research is based on suggestions from others- ie forum contributors are suggesting companies-to-review to give them confidence on their current position on a company. They suggest companies they have already thoroughly researched, know is “healthy” and have invested in themselves- they just need affirmation.

In terms of NextEra- I think i’ll be giving this one a miss just now. Just too risky.

Brill work on the analysis though… as per usual.

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Can I get a Toyota motors please? Would be interested to hear your take on their prospects given their focus on electric

Also Nicola, even though I don’t get the hype

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Good suggestion, splitting the summary into pros and cons, that would make it a bit easier.

Interesting point on the bias. I haven’t invested in all the buys, though a few companies I’ve written and then brought after convincing myself, not sure how good a thing that is!

I do find it much harder to judge sell’s and to call out a company as failing. Though I understand your points, it’s something I need to think on more. I agree if someone has suggested it I would be inclined to tell them what they want to hear, or they already know it’s sound as they hold it.

This is normally the part of the investing and trading books where I wish I could understand it all more! Do you have any reading suggestions? This always comes up with investing.

All of that said, all this feedback is proving to be amazingly helpful! I’m not selling companies as often as I used to now, I’m holding positions for longer and having more confidence in my analysis. Hopefully these posts entertain and give a pause for thought, but it’s really helped me narrow down the way I think about my portfolio.

As always, thanks for reading all my posts! Stay safe and well :star2:

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eBay - Has it already peaked?

I’ve had my eye on eBay for a while but never found a good time to invest. After reading the news about the cyberstalking by a previous founder I decided to stop putting my analysis off!

ebay logo

What Has Changed With eBay?

If like me, you know the brand but haven’t invested you might have missed the latest news. A week ago eBay announced $750m of financing in unsecured notes with the primary purpose of paying off its 2021 notes and any other debt which is more expensive than this offer, before using the proceeds for general admin.

eBay also increased their forecasts for Q2 2020. Apparently, between April 29th and June 4th, eBay has seen “significantly better than expectations” and due to the “magnitude of this change,” they have increased estimates. With the current user activity already running at the higher end of the original estimates, and “all major verticals are accelerating significantly compared to previous quarters.” As COVID-19 lockdowns start to ease up and businesses are encouraged to reopen, eBay is seeing increased growth.

ebay growth
Source: eBay Investor Relations

While this sounds strong on the surface, the announcement also includes a mention of its marketing activities and increasing the spend. eBay is giving new sellers the chance to sell for free, has extended seller protection and incentives, and increased the amount of free fixed fee listings you can have. These activities were critical as shelter-in-place orders were issued, carrying these offers on could be seen as snapping up more marketing share while businesses are looking to reopen or it could be leaving money on the table.

The biggest news is the new CEO has joined and been in charge from April 27th, Jamie Iannone. He’s worked on digital products for Barnes & Noble, CEO of SamsClub and promoted to COO of Walmart. We have yet to know what changes his influence will bring.

How Do eBay’s Fundamentals Look?

With Q1 out and judged by the market, and recent announcements about future growth already digested, we are in the perfect spot to think about the facts and figures.


Source: Genuine Impact

On the surface, eBay looks to be an extremely solid long term investment. Financially sound, a little overpriced but we aren’t talking Tesla levels, and strong future growth (as per their Q2 estimate update.)

Let’s dive into the raw numbers to understand and highlight the strengths and weaknesses of eBay.

One of the biggest attractions for investors in the early days of eBay was PayPal, which then turned into a risk. These days eBay is moving to its managed payment solution, it’s a big step to vertically integrating and removing 3rd party risks.


Source: eBay Q1 2020 Presentation, MS&O = Marketing Services & Other Revenue

In terms of revenue, we are slowly decreasing. The trailing 12 months compared to the previous period is showing an increase but the quarterly trend is turning negative.

We are still looking at $10.5bn in revenue over 12 months. These numbers were even more impressive back in 2015, we were closer to $19bn back then. The revenue eBay brings is interesting, but what is impressive is the 76.78% gross margin with a punchy 16.54% profit margin.

That profit margin does have a consistency problem. As eBay buys and sells competitors and brands the profit swing. Taking a step back to previous annual profit margins we have 23.54% in 2018, -10.62% in 2017, and 80.92% in 2016. The wild inconsistency of their profit margin makes it harder to gauge if they are keeping their position as the market leader without anecdotal evidence.

I am also worried about the rising levels of debt to assets. Reported to be 88.83% last quarter, and increasing every year since 2016.

ebay debt
Source: Wallmine

Financially eBay seems very strong but they aren’t filling me with confidence this can last, not without ongoing heavy investment. Either that profit margin, which is already temperamental, is going to shrink or the debt will overtake us.

eBay also recently joined the dividend club, they have been paying out since 2019 and they have been aiming for quarterly payments. I wouldn’t get too excited, a 1.26% dividend yield is more of a drag on the share price than paying back to shareholders effectively.


Source: Google Finance

Looking at the value assessment we start strong with a price to earnings ratio of 7.93x which is below the S&P 500 average but not at Buffett lover levels of interest. At the end of Q4 2019, this was over 50x but it normally flows in the teens.

eBay has a price to book of 11.74x and a book to share ratio of 4.08x. This is attractive compared to some of the tech companies in the US but isn’t going to covert any deep value fans.


Source: Genuine Impact

Looking to the future the sell-side analysts are all shifting to a hold stance. eBay recently hit a nice peak and has started to smooth out again. Looking back historically we see a lot of V shapes and periods of low volatility.


Source: Wallmine

The future share price also reflects this meeker outlook of not much happening, and that low dividend isn’t doing much to hold my attention.

Summary Pros

  • History of strong finances
  • Involved in M&A activity to grow and expand internationally
  • Rolling out their payment solution for deeper vertical integration
  • Coming out of COVID-19 with strong traction

Summary Cons

  • Volatile profits and spending
  • Unproven CEO taking control
  • Debt is increasing with no sign of slowing
  • The second wave of COVID-19 would destroy increased estimates
  • Are they still disrupting or at risk of being disrupted

My Thoughts

eBay is a nice simple long term investment, if you are looking for a five year buy and hold there are worst things to do with your money. I don’t hold eBay and don’t plan on buying it. If I held eBay I would look to exit.

There isn’t the exciting growth I would expect from a company like eBay. There are more interesting or reliable places to put my money. As a business, they have turned into a slower-moving giant, and they don’t give me the impression they are doing enough to protect from disruption other than increasing marketing spend. The technology seems to be keeping pace with competitors but they aren’t passing anyone.

For me, eBay doesn’t give me the confidence it’s going to be a smooth upward trend for the next five years, and it doesn’t show signs of any radical innovation which would meaningfully move the needle. eBay might be a household name, but it’s not an investment that will live in my portfolio.

Let me know what you think, do you have a different view on eBay? Is there more to expect which I am missing? Or is my view too pessimistic?

Thanks for reading and stay safe.

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I really like the change to pros and and cons / summary. Keep it up, great content and analysis for the FT forum

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Can I request Cloudflare or Atlassian?

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I am a big fan of Cloudflare as a user, and I live with the Atlassian products :rofl:

I know Atlassian have been on a serious rally a month ago which is now dying down. Might be worth taking a look at them and seeing if they are going to keep dipping or about to balance out :thinking:

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Likewise I’m a huge fan of Atlassian’s project management tools as I know many are however I’m curious to see if that converts to their funamentals and if this could be a good opportunity to buy

As for Cloudflare, it’s mainly their customer reach that they have that I’m impressed with. I remember a few years ago when they had an outage and pretty much the whole internet when down

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Very interesting, I did look at Ebay, though it was quite a few months ago now, and also decided not to buy as the growth wasn’t there.

Would agree that Atlassian could be an interesting one

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Thanks again everyone for the great feedback! I’ll have a think about what to review today. I’m tempted to pickup a UK firm as I haven’t covered one in a while, though more frequent financials make US firms easier!

As always hope everyone is staying safe and thank you for taking the time to read all my posts! It’s definitely being better received than I could have imagined and it’s really encouraged me to learn more about stock analysis!

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It’s us that should be thanking you. Possible side hustle for a few extra ££’s when you’re back at work?

Great job. :+1:

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Burford Capital?

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I’ll add it to my list!

I’ve started looking at an interesting company, just reading through all the reports now! Hopefully I’ll get everything researched and written in a few hours :timer_clock:

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British Airways (IAG) about to take off?

International Airlines Group (IAG) the owner of British Airways, Aer Lingus, Iberia, and two other retail transport airlines, a cargo business, a loyalty program, and finally a dedicated restructuring and business transformation arm. Is my focus right now seeing how COVID-19 has spelt serious trouble for the group.

Even now we are seeing the UK government call out IAG’s actions relating to how they are coping with COVID-19.

iag logo

Is IAG In Trouble?

Yes is the short answer. Supposedly the group is burning £20m a day with almost no revenue generation from the airline groups. Cargo, loyalty schemes, and business operations are still in full swing but this was never the big-ticket revenue generators.

That said there also aren’t going to be falling off the radar any time soon. Two weeks ago one of the owned IAG brands has brought out a competitor, a move which has attracted a lot of negative press due to their increasing dominance and seemingly inconsistent approach to how the airlines are doing. BA is firing its staff and rehiring them on cheaper contracts, while Iberia is buying competitors.

It’s this dynamic of moral issues, a damaged industry, the CEO stepping down in September, and a global pandemic which has made me want to look at IAG as a shorter-term investment opportunity.

Is IAG Fundamentally Strong?

We only have the Q1 figures to go off and any announcements IAG has made to build up a picture of IAG life during COVID-19, which they have clearly been as light as possible on.

iag passengers
Source: IAG Q1 2020 Traffic Report

We know that flights have been grinding to a halt, domestic and international travel has been restricted or blocked. However, without a Q2 report, we don’t have any official insight into the impact. Given the massive cutbacks and use of government support, we know the impact is single biggest threat IAG has faced in its nine-year life.


Source: Genuine Impact

While the surface figures don’t look alarming, we are dealing with fundamentals which don’t include the current impact, the only dynamic bits to the company assessment is the current price and latest analyst ratings.


Source: IAG Q1 2020 Report

Looking at the annual figures IAG was brining in around €25m a year in revenue with a profit margin bouncing between 6-11%, 2016 and 2017 saw 8.56% and 8.69% respectively with 2019 dipping to a low of 6.72%. If you look at Q1 we even saw a -36.71% profit margin for a three month period where we had one a bit good months of travel.

It’s no secret that airlines struggle with profitability. With a gross margin of 28.48% in their 2019 full-year statement, that doesn’t leave a lot of wriggle room. Not to mention the pilling debt which has no doubt taken a serious turn for the worse.

In 2019 we had 80.85% debt to assets, with €12.7m in current liabilities. Even in that report the current assets only came to €11.3m. The biggest asset IAG has is it’s fleet and sites, coming in at €19.1m, however, the planes need maintenance and ongoing expense and the sites are only useful for other aerospace firms or Top Gear. The point is I don’t have a lot of faith in these long term assets being worth as much as the balance sheet claims.


Source: Wallmine

With increasing debts, lower profits, and an increase in financing, even without COVID-19 this wasn’t the healthiest looking firm. Then why was this one of the hot stocks, and why is it making a comeback?


Source: Google Finance

News that flights would reopen gave the stock a recent boost, but firing their staff and rehiring them, as well as the UK governments isolation after travelling plans have restricted any upward momentum.

The value metrics are all very misleading, firstly we have had a negative quarter, the liabilities and assets are assumed to remain the same, and even looking annually we aren’t accounting for what could be three or more heavily negative quarters.


Source: Wallmine

While IAG is losing money I’m not expecting this dividend to be flowing, but once we get into a more stable position this will be a big attraction for other investors. Assuming that IAG isn’t going to fail within the next year, the company is taking steps to payout to shareholders in the long term.


Source: Genuine Impact

The sell-side analysts are also pretty punchy in terms of IAG’s future. They can raise and manage more debt and can increase profitability by making the cuts which they have been performing over the last month or so.

I’m not surprised to see strong support by analysts, and even a consensus share price target of £4.2781, compared to the current price around £2.70~.

Summary Pros

  • IAG can generate large profits and is geographically spread out
  • Buying up competitors while the market is cheap
  • Taking full advantage of government support in multiple regions
  • Already gone through the painful shrinking process
  • The market is eager to invest back into the firm once travel restrictions are lifted
  • Big dividend to tempt in other investors and give them confidence, producing more momentum

Summary Cons

  • Growing debt and the new state of debt is unknown
  • Very fragile and reactive to COVID-19 news
  • Collecting a large amount of bad PR
  • Growing size could attract government attention, especially if they need more government assistance

My Thoughts

Right now I am looking at IAG as a huge momentum play. News of the 14-day self-isolation in the UK and around the EU being eased would be a massive boom. I think fundamentally the airline industry is a tough sell, and coming out of COVID-19 is going to leave a stain on their balance sheets for the next couple of years.

I am intending to buy into IAG and set myself the £4.00~, just under the sell-side estimates. If we can hit that price point in the next three months and the price begins to wobble again, I’d be happy to sell out and put my cash elsewhere.

Best case we see a closer return to old figures, but I don’t see that happening once we see the state of the new debt. It would be overwhelming momentum and lighting in a bottle moment if we saw the £5 mark within the next six months.

Let me know what your thoughts are on IAG? Is this a company you are invested into, or one you have been watching? As always I love to hear your feedback!

Thanks for reading and stay safe.

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