Ride the travel rebound with 7 less risky stocks

  • By Avi Salzman,
  • Barron's
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Walt Disney’s (DIS) announcement this past week that it plans to reopen its biggest U.S. theme parks in July—with everything as sanitized as the love affair between Donald and Daisy Duck—highlighted a remarkable turnaround for travel stocks.

In the past two weeks, the shares of hotels, cruise lines, and airlines have all risen more than 20%.

Americans have been quite literally pent up for the past two months, and travel demand is pent up, too. The travel stocks are the latest market laggards to rise, and also have the trickiest roads ahead. Most are still down more than 30% for the year.

But Barron’s has identified seven stocks—in travel and in ancillary businesses—that appear insulated from the worst of the uncertainty and could be lifted over the next year by an emerging revival in travel.

Many of these stocks— Spirit Airlines (SAVE), Southwest Airlines (LUV), Delta Air Lines (DAL), Extended Stay America (STAY), Lindblad Expeditions Holdings (LIND), Marathon Petroleum (MPC), and Las Vegas Sands (LVS)—operate in more-attractive niches of the industry, from budget airlines to extended-stay hotels.

The broader economy is in recession, but the travel industry is arguably going through a depression. More than half of the people employed in it have been laid off, representing 38% of the total job losses in the U.S. through April, according to the U.S. Travel Association, an industry group. For the year, U.S. travel revenue—normally a $1.1 trillion industry—is expected to fall 45%.

While the country is gradually reopening, many Americans simply are not ready to venture far from home. The latest Harris Poll shows that 53% plan to put off their next trip until 2021. The number of U.S. passengers flying is still down more than 85% from a year ago. Some tourist havens have become ghost towns.

Business travel faces a higher hurdle. It will undoubtedly return, but perhaps not in the same form or with the same frequency as before . That is a huge worry for big airlines and hotels, which depend on corporate expense accounts to keep their margins up. The latest survey of travel industry professionals from the Global Business Travel Association found that only 15% of respondents expect most employees to be willing to travel for the first six months after restrictions are lifted.

“Nobody knows when the business community is going to feel it’s safe to fly,” says Mark Stoeckle, CEO and portfolio manager at Adams Funds. “I don’t know whether that’s July or October or January. So in that kind of an environment, I’ll be happy not to be in those stocks.”

Travel—business and leisure—is likely to return in stages. Not surprisingly, the path of the recovery has a lot to do with the path of Covid-19 itself.

The rebound “will not be linear,” says Axel Hefer, CEO of the travel search site Trivago (TRVG). “Travelers will be in a different state of mind. Some will progress faster, some much slower. It will depend on age, health conditions, where you live, and to what extent you’ve experienced the first outbreak. If you’re coming from northern Italy, it is more likely you’ll return more slowly than from areas where it isn’t really as severe.”

In the oceanside town of Bar Harbor, Maine, the hotels are normally packed this time of year through Labor Day. Yet just one small inn was operating over the Memorial Day weekend—and it was admitting only state-approved guests, including scientists working at a nearby lab.

“You’ve gone from a situation where you would normally have 2,000 rooms rented, down to 15 rooms,” says Stephen Coston, who owns that property, the Inn on Mount Desert. “The people who own the restaurants and shops are realizing, ‘Oh my God, holy cow, this is really happening.’ ”

Nonetheless, there are already signs of renewal. On weekdays, U.S. roads are still mostly empty, but traffic on the weekends is about as busy as it was before the pandemic, cellphone tracking data show. On June 1, Delta will restart flights from New York to Paris, and bars in the Florida Keys will begin serving Rum Runners to tourists.

Coston says his July bookings are trending toward 40% occupancy, and he hopes that occupancy eventually exceeds 75%—a “lousy” number, but no longer a doomsday scenario.

In the longer term, Americans have not lost their wanderlust. In fact, the crisis might actually inspire them to eventually explore even farther than they used to. Once the pandemic ends, 59% of Americans plan to travel the same or more than they did before, according to a survey from the consulting firm Oliver Wyman.

The first trip that many families take will be self-directed, where they can control the environment, Trivago’s Hefer predicts. Data from his company show that people are gravitating to vacation rentals—20% of users clicked on rentals in May, up from 11% in February.

They mostly chose the beach over amenity-filled metropolises, with Myrtle Beach in South Carolina and Panama City Beach in Florida the No. 1 and No. 2 destinations nationwide.

The third most popular? Somewhat surprisingly, given many Americans’ preference for the outdoors this summer, it’s Las Vegas. Casino gambling will return on June 4, with low capacity limits and new sanitation practices meant to keep hot slots from spreading fevers.

Adams Funds’ Stoeckle bought Las Vegas Sands stock after the crash and thinks that it still has room to run. Not only does the company have 18 months’ worth of cash on hand, but also its properties in Macau have already been up and running for weeks, he notes.

The stock has risen 25% since mid-March, around when Adams Funds bought in, but it remains down 30% for the year. Las Vegas Sands suspended its dividend in April, and analysts expect it to post a loss this quarter. But positive earnings should resume in the third quarter.

Even assuming that 2021 earnings barely get back to two-thirds of their prior levels, the stock still trades at 20.5 times expected earnings, a reasonable multiple for the company in historical terms. “We have a good runway,” Stoeckle says.

The Adams Funds CEO says that he also looked at the stocks of hotels and airlines, which were beaten down similarly to Las Vegas Sands shares. But many of those companies are much more dependent on business travelers, so he held back.

Counterintuitively, business travel can feel discretionary at a time like this, Stoeckle notes.

If one of his employees got sick at work, “it’ll kill me. It’ll just tear me apart,” he says. Asking an employee to travel to meet a client—or even come into the office before it’s absolutely necessary—feels high-risk without a Covid-19 vaccine or effective treatment available.

“I don’t want my employees on a plane,” he says. “I can control that. I can’t control you taking your family to Niagara Falls for a few days. Because of that, I suspect that the individual might come back faster than the business guys.”

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