It’s becoming increasingly clear that we are in the beginning stages of another wave of COVID-19. According to the New York Times, the United States estimates a record 500,000 new infections in just the past week.
Many health experts believe that it could be worse now than in previous surges during the spring and summer. That’s because there has been a relaxation in terms of social distancing and mask-wearing, and the winter weather means that people will have fewer options to socialize or spend time outdoors.
Also, health experts believe that the summer surge was blunted by the humid weather which dampened the transmission of the virus. Colder weather brings less humidity, which will increase the transmission. Dr. Anthony Fauci has warned that wearing masks and social distancing may have to continue into 2022.
Given these developments, it’s not easy to be bullish on travel stocks or the sector. Fauci’s recent comments could mean that a return to 2019 levels of activity and spending for the travel industry might not happen until 2022-2023.
This has resulted in steep losses for travel-related stocks over the last couple of days. For example, the airlines ETF - US Global Jets ETF (JETS) - is down more than 12% in just the past few days.
A rally in this sector is certainly contingent on positive news about a vaccine. However, another interesting development is that TSA travel data continues to show an upwards trend in the number of people traveling through an airport.
This recovery is encouraging for the airlines and the travel sector. Back in March and April, travel was down 80 to 90% compared to 2019 levels. Now, it’s around 40%.
So far, travel stocks have performed better than expected given the unprecedented challenges created by the coronavirus. Airline and hotel stocks have gone bankrupt during past recessions when travel volumes and bookings were only down 20%. Some of this resilience is due to government stimulus, as airlines and hotel stocks are performing better than cruise stocks which don’t get government stimulus at all.
Until this past week, the travel stocks were not affected by increasing case counts. Increasing case counts hasn’t caused a decline in the number of travellers but it has stopped growing.
It seemed possible that the market had digested the near-term losses of these businesses, and the equities would perform well as the health situation improved and a vaccine became available.
There would also be an inevitable, bounce back when pent-up demand is unleashed. Additionally, the larger, public companies might have an even more dominant position in terms of market share and pricing power, as smaller operators may be forced out of business.
However, if the timeline for a recovery is delayed to 2022-2023 from current expectations of 2021-2022, then travel stocks may take another dip and even retest its March and April lows.
Within the Travel Sector
Some differentiation is also developing within the travel sector.
Another surge in infections is catastrophic for cruise stocks. Cruise companies are losing money every day that their massive cruise ships are sitting offshore. The ships are also uniquely vulnerable to a contagious virus, and it doesn’t seem like cruising can resume as long as the virus is a threat.
Additionally, cruise companies are headquartered in the Caribbeans to take advantage of lax tax and labor laws. This might be a strategically savvy choice in some circumstances, but it’s currently a liability, as they are not eligible for government bailouts or assistance that have cushioned the blow to many travel stocks.
Investors should watch for an announcement about the delay of the sailing ban that is supposed to be lifted on October 31st. If that were to occur, that would be very detrimental to this industry.
One surprising development is that airplane travel has proven itself to be remarkably safe given the air filtration systems. According to the CDC: “Most viruses and other germs do not spread easily on flights because of how air circulates and is filtered on airplanes.”
Additionally, no major outbreaks have been connected to air travel. Given the nearly-quadrupling in air travel and time that has passed, it would be very clear by now if airplane travel was leading to outbreaks.
The air travel that has been returning are visits to see family or short trips for leisure. This type of travel is rebounding quicker, and it’s benefiting smaller, more regional airlines like Alaska Air (ALK), Southwest Airlines (LUV), and Allegiant Travel (ALGT).
Though leisure travel has been increasing over the past few months, business travel remains depressed. And, it’s expected to remain low as many conferences have been canceled with many companies banning all business travel into the middle of next year.
In its place, tools have emerged like Zoom Video (ZM) conferences, virtual meetups, and online groups. And, some people believe that some chunk of this travel may be permanently displaced even when the world returns to normal. This wouldn’t be surprising given the cost-savings and convenience aspects.
A variety of stocks are affected by less business travel. Airlines like United Airlines (UAL) and Delta Airlines (DAL) derive a major portion of revenue from business travel. So do hotels like Marriott (MAR), Hyatt Hotels (H), and Wyndham Hotels & Resorts (WH).
Online Travel Brokers
One issue with a delayed recovery for travel is that many cruise operators, hotels, and airlines have huge liabilities that are going to be due regardless of the coronavirus situation. This might lead to more dilution or debt issuance which negatively impacts future earnings. And, if a recovery is sufficiently deleted, it’s even possible that it could lead to more vulnerable companies going bankrupt.
In contrast, online travel brokers give investors exposure to the travel sector without these liabilities. The bull case for online travel brokers is simple and compelling. Over the long-term, total travel spending will continue to increase on a multiyear horizon. Humans have an innate need to travel and explore new places. When the health situation improves, there will be huge, pent-up demand. Once this pent-up demand is exhausted, travel spend will likely return to its pre-COVID levels and resume its 5% growth rate.
It’s also likely that Generation Z and Millennials will choose to book their travel online through websites like Booking.com (BKNG), Expedia (EXPE), or TripAdvisor (TRIP). These stocks will benefit from any type of increase in travel spending.
The online travel brokers might be the most interesting way to play the inevitable rebound in travel. They lack the fixed costs of many travel-related companies which means they can endure another year of depressed spending. However, in the short-term, they are likely to be impacted by negative coronavirus news, so investors should remain patient and wait for low-risk entry points.
2 Travel Stocks to Buy
Among the online broker stocks, I believe that Booking.com (BKNG) has the best chances to outperform given its dominance of multiple niches. The coronavirus has led to a short-term drop in revenue and earnings, but in the long-term, it’ll be an opportunity to own market share.
The biggest beneficiary of the increase in air travel has been regional airlines. Among this sector, Allegiant Travel (ALGT) is the most compelling, since it’s focused on low-competition routes and less reliant on business travel.
According to the POWR Ratings, ALT is rated a Buy. It has an “A” for Peer Grade and a “B” for Trade Grade. Among Airline stocks, it’s ranked #
2 Travel Stocks to Avoid
In terms of travel stocks to avoid, the most obvious is the cruise stocks, including Carnival Cruises (CCL) and Royal Caribbean (RCL). CCL is down by 50% since its June high, while RCL is down by 30%.
Any delay in the timeline for cruising to resume will mean billions of dollars more in losses. Even if cruising were to resume, there would be higher costs due to fewer passengers, more sanitary measures, and social distancing.
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CCL shares were trading at $12.80 per share on Wednesday afternoon, down $0.96 (-6.98%). Year-to-date, CCL has declined -74.52%, versus a 4.03% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.2 Travel Stocks to BUY, 2 to AVOID appeared first on StockNews.com