As America went into lockdown from the fiercest pandemic in a century, travel took a back seat to safety and home. Vacations, commuting, dining out, attending sporting events, trips to casinos, all came to a screeching halt. These businesses closed their doors, furloughed their employees and went into survival mode. They hoped to shepherd their cash to make it through a quarantine that had no known end.
On the flip side, the “stay at home” trade flourished. Think exercise bikes (Peloton (PTON)) delivery (Dominos (DPZ)), home videos (Netflix (NFLX)), even the home fix up trade (Sherwin Williams (SHW)) for paint and Scotts Miracle Gro (SMG) for lawn improvement). However, those stocks have gained mightily at this point.
Travel and entertainment stocks have rebounded dramatically since the putative bottom. March 23. Cruise stocks are up 50 to 93%, gaming stocks are up as much as 102%, and the airline ETF (JETS) is better by 38%. However, they are still well off their highs reached just before the pandemic downturn. The airlines ETF is still off 45% from its 52 week high, the cruise ships as much as 65%, and the gaming stocks are down by, in some cases, 45%.
In a Nutshell
Long term investors may still find bargains by sifting through the carnage of travel and entertainment (T&E) stocks. While Wall Street rightfully frets that many areas of the market, particularly tech related, are approaching valuations not seen since the late 1990s, that’s not the case with the T&E group.
These stocks are most linked to health developments. Wall Street and the world eagerly await news of a vaccine, not just its development but its manufacture and distribution. Improved testing would help, too, so that restaurants, airlines, sporting events can quickly, cheaply, and definitively determine whether someone is infected. A cure, is also sought; if death as a possible outcome could be taken off the table, consumers would literally breathe easier.
The other wild card with these stocks is consumer psychology. Covid cases may be down, entertainment sites reopened, and bargains to be had, but if travelers and leisure seekers don’t feel safe and comfortable, they won’t engage. No finance degree will tell you exactly how the
American public will respond to the desire to leave quarantine versus the risks that may still well lurk. Be sure that Madison Avenue creativity will figure out ways to entice; will certain venues be “certified” Covid free, will you have an opportunity to shop in the Clorox mall, will we opt for a Lysol airplane?
What is the potential upside? Consider Carnival Cruise (CCL), at the epicenter of the Covid fears, as ships of partygoers have been labeled petri dishes for Covid. Most medical experts believe a vaccine will be found, and it is widely believed that once that’s the case we can get back to normal. How long will that take? Many had hoped by the second half of this year, but next year is more realistic.
One hundred companies are said to be working on a vaccine. Merck (MRK) has three initiatives in development, Moderna (MRNA) will conduct Phase III trials on its vaccine in July, and the US Government has recently granted $1 billion to Astrazeneca (AZN) and Oxford for vaccine development. Surely a vaccine will be developed in the foreseeable future. Given that Carnival was at $52 in January and is currently at $18, if it returns to its January price within a decade the average annual return will be nearly 12%. Few prognosticators expect the overall stock market to return that in the next ten years.
We know that overall economic statistics are getting better. May joblessness improved over April’s. Weekly unemployment claims are trending down. The index of leading indicators is improving, as are various measures of manufacturing activity. The stock market itself is a pretty good forecaster and we know this is the second quickest rebound in history.
T&E is coming back, too, albeit from very low levels. Indeed, in the first week of April activity was at a standstill. Now, week after week the TSA reports more air travel, restaurant bookings are up, more miles are being driven, casinos have opened their doors to strong demand, even mass transit usage has ticked up.
The Risk: Reopening Leads to Resurgence
A major threat to the T&E story is that there’s a resurgence of Covid-19 cases as states reopen but the public fails to take the necessary precautions to prevent spread. This can lead to consumers being fearful to leave their home for entertainment and or new quarantine rules being imposed.
Balanced against this risk is that daily we are getting closer to new healthcare tools, like vaccines, testing, and therapeutics. We also believe that the initial fear of catching Covid has been softened as the unknown is less so. Consumers may counter the fear of the virus with concerns over their economic health and mental wellbeing.
Ways to Invest in the Reemergence of Travel and Entertainment
The best portfolios balance the upside of the consumer emerging from lockdown with the risk of it being delayed considerably, whether due to a vaccine’s delay or a fierce resurgence as consumers let their guard down. To hedge on which scenario materializes, invest in both the stay at home stocks as well as the recovery plays. However, to bet on consumer recovery, consider these stocks and companies.
Anecdotally, Americans pine for a chance to leave home, select from a menu, and have a meal brought to them. It is hard to imagine the new normal not including eating out.
Standard ways to play the reemergence of traffic at restaurants is investing in companies like McDonalds (MCD) and Starbucks (SBUX). Both have the advantages of size; the downturn has hit smaller mom and pop outfits with less resources harder. One weakness in the two is that both rely on the breakfast trade. To the extent Americans continue to work from home, buying breakfast out or a coffee on the way to work may be less common.
Restaurant Brands International (QSR) is the third largest fast food outfit, the franchisor of Burger King, Tim Hortons (donuts), and Popeyes (chicken). We like that operational risk and money invested in real estate and equipment is the franchisee’s, or actual operator. QSR’s revenues come primarily from royalties and sales to the franchisees, which generate $34 billion in revenues annually. The stock is down by nearly 20% from its February price. Even if it takes three years to come back it would be a worthwhile investment, especially when you include the near 4% dividend.
Perhaps the quintessential T&E stock is Walt Disney (DIS). Its theme parks are the ultimate family destination, but Covid concerns shut them down worldwide; they are just now slowly getting back on their feet. Of course, DIS is more than theme parks; its other segments have also been hit hard by the virus. For example, ESPN, its sports channel, has had little content to show its audience with nearly all sports on lockdown. The stock is down by nearly a third from its pre-Covid highs. Risk is mitigated due its film prowess and new streaming service, Disney+, which should do well whether the consumer is locked down or out and about.
You’d think that what you eat, drink or smoke would be winners whether there’s quarantine or not. It turns out that what’s consumed at home carries much lower margins than what’s enjoyed on the road. Think about the cost of buying a soda at the ballpark versus taking home a case.
Consumables is the perfect low risk way to play the recovery trade as consumers leave their home to travel and entertain themselves. If the second wave comes, their products won’t be abandoned, but rather enjoyed at less cost at home. To profit, consider beer, soda and candy makers.
Coca Cola (KO) reported that volumes and margins are down as less high-margin soda is being sold outside the home. The stock is off nearly 25% from its pre-Covid high in February. As travel reemerges, this stock could take back that 25%; in the meantime, enjoy the 3.6% dividend.
Hershey’s (HSY) also acknowledged that that Reese’s bars are more profitable when sold at the movies than via a bulk bag for home indulgence. The stock is more than 20% off its pre-Covid high and offers an above average 2.4% dividend. It controls 45% of the domestic confectionary market but its sales in nearly 85 other countries only provides 10% of its revenues. International is a potential growth opportunity.
Anheuser Busch (BUD) owns not just the leading beer brand in America, Bud Light, but also five of the planet’s top ten brands. While beer consumption is under pressure due to hard seltzer, BUD has the distribution heft to dominate that market too. As consumers come out of their homes, expect overall sales to grow, giving BUD an opportunity to more than double to its pre-virus high stock price.
Note: Of the stocks mentioned above, the following are owned by DG Dietze, his family, and or Point View clients: SHW, CCL, MRK, AZN, MCD, SBUX, QSR, DIS, KO, HSY, and BUD.
Note: David Dietze is President and Chief Investment Strategist at Point View Wealth Management.
Point View Wealth Management is an SEC-registered investment adviser and part of Peapack Private Wealth Management. For over 25 years, Point View Wealth Management has been providing customized portfolio management services and comprehensive financial planning solutions for individuals and their families to develop and achieve their financial goals.
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