IAG's 2.15 Bet: A Five-Year Strategy Undone by the Pandemic

Buying IAG at 2.15 and waiting five years: the thesis the bicho devoured

What happens when you buy a stock convinced that time is on your side, only for time to bring a pandemic, a capital increase, and two waves of a new bicho instead? That's exactly what peine to someone who, in 2020, bought 3,500 shares of IAG at 2.15 euros. The thesis seemed impeccable: planes would fly again, Iberia and British Airways dominate intercontinental routes to America, and over ten years, it didn't matter if you entered at 2.15 or 1.50. No one accounted for a trapdoor in the chart's floor.

In just a few months, the stock went from nearly 4 euros to below one euro. The entry at 2.15 wasn't the bottom; it was the first floor of a building that kept falling. And with each step down, conversations filled with staggered purchases, average prices, and that timeless phrase: "if it drops below 2, I'll average down".

The patient buyer's thesis, tested exam after exam

The initial argument was based on a simple, hard-to-refute idea: IAG wouldn't disappear. It's Europe's best flag carrier airline, the most optimistic argued, and when the 'bug' passes, it will make money again as before. The devil, as usual, was in the balance sheet.

Those who looked at the numbers instead of the flags said it plainly: IAG was burning through a full year's profits per quarter, and had been doing so for three consecutive quarters. At that rate, the question wasn't if it would fly again, but how many capital increases would be needed to survive until it took off.

There was a circulating calculation that sent shivers down spines: a capital increase of 2.75 billion euros for a company valued at around 3.6 billion on the stock market. Adding nearly 70% more shares without a proportional increase in profit has a technical name: dilution. And a less technical name used by the more graphic analysts.

The day IAG hit 1.04 euros

Everything that went up, came down. In June, the stock was trading at 3.67 euros, and many sold in time. Those who didn't witnessed a collapse that took the stock down to 1.04 euros by the end of October. That's where each person's role is revealed: those with a stop-loss got burned; those going long held on, praying.

The psychological aspect is well-documented in any manual and no less real for it. Buying at 2.30 when the stock came from 8 euros creates a false sense of a bargain, ignoring the changed context. Then you buy at 4 to fix the purchase at 2.5, and so on. The most seasoned analysts summarized it with a telling image: basic gazelle psychology.

The turnaround came with news no one expected at that point: Moderna's vaccine. The entire tourism and aviation sector surged in a matter of days. And with the rebound came suspicion. If the vaccine was so close, why was the company's chief medical officer selling a lot of shares those same days? Add two and two, they said.

Why didn't the vaccine resurrect IAG?

The optimism lasted as long as a headline. IAG rose, yes, but far less than the 2.15 buyers had dreamed. The 2-euro resistance became a wall. And there, another debate began: if with a vaccine, a Brexit deal, and a capital increase already priced in, the stock wasn't taking off, what did the future hold?

Some argued that the problem wasn't the news, but the model. Starting to fly can lose more money than not flying: an airline is a high-volume, low-margin business, and the difference between carrying 140 passengers or 170 on each plane is precisely what separates profit from loss. With planes half-full, it's better to stay grounded.

The most repeated comparison was uncomfortable: the airline sector in this crisis was akin to banking in 2008. Cyclical sectors, with heavy debt and balance sheets dependent on everything going perfectly. And Warren Buffett had exited the sector precisely for that reason, skeptics recalled.

Aircraft leasing as an alternative to airlines

Instead of direct stock purchases, some proposed a twist: instead of investing in the operator of the planes, invest in those who lease them. The reasoning is logical: you keep the asset and avoid the airline's debt-laden balance sheet.

The names mentioned were AerCap, Air Lease, and Fly Leasing. The first two, larger and diversified with higher-quality clients; the third, smaller and with worse clients, although it usually traded cheaper. The idea resonated with those who wanted sector exposure without the risk of another capital increase.

Time, however, showed no mercy. A new bicho outbreak, a hard Brexit, and the threat of a second capital increase sent IAG back to 1.25 euros. British Airways added a 2 billion euro guaranteed loan to its burden, and the cash-burning machine kept running. Those who had bought at 2.15 saw their thesis drift further away quarter by quarter.

The balance sheet of those who sold, those who held, and those who were wrong

At the end of the journey, positions remain divided. Some acknowledged the blow and retreated with losses, licking their wounds. Others sold in time, taking advantage of rebounds, and learned "expensive lessons." And a few – the fewest – maintain that IAG still has enormous revaluation potential, though not at these prices.

The most honest calculation admits that money is only made when selling, adding dividends and subtracting commissions and taxes. Everything else, while the stock remains in the portfolio, is smoke. And smoke disperses quickly when the market wind blows.

In hindsight, everyone is a genius. Everyone says that. What almost no one confesses is that those who warned were right, and the narrative of "they won't let it fail" prevailed over the only question that mattered: does the balance sheet hold up?

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With the stock reclaiming the 2-euro mark and eyes set on the results, the doubt remains. The story isn't over. It's only over, for now, for the portfolio of whoever bought at 2.15 hoping for a 3x return.