How to Play The Sizzling Online Travel Sector

One of my featured consumer trends is online travel, and the space is looking even better of late. The recent Fourth of July holiday was just one indicator of the sector’s strength, as AAA predicted that close to 42 million Americans would travel 50 miles or more during the weekend — the most since 2007.

Catalysts for this momentum include cheaper gasoline prices, a slow-but-steady rise in the labor market, and consumer confidence. The momentum is especially noteworthy since the Fourth of July weekend is the busiest summer holiday travel period. Estimates for travelers were 13% higher than for the Memorial Day weekend travel forecast, for instance, which was also sitting at record highs. More specifically, Memorial Day forecasts were the best they’ve been in the past decade.

It’s no surprise, then, that Piper Jaffray’s Michael Olson recently cheered about the sector, causing gains for some of the biggest names in the space. One such name is vacation rental marketplace HomeAway (NASDAQ:AWAY). My GameChangers subscribers locked in 50% gains in the stock last year, and it may be worth a second look for some investors in the wake of broad sector strength.

But, even beyond AWAY, there are plenty of solid picks to examine in this sector. Two of the biggest players and best-performing stocks are Expedia (NADSAQ:EXPE) and TripAdvisor (NASDAQ:TRIP), as both are out-performing the broader market and their peers on a year-to-date basis.

Expedia, for one, rode the Nasdaq’s strength to over 2% gains yesterday, bringing its total out-performance to 29% — more than triple the tech index’s climb. The company will be in the spotlight in a few weeks, too, as it reports earnings on July 30.

Currently, the consensus is for a drop in EPS, despite double-digit revenue growth. Because of the recent out-performance, which came even with two consecutive earnings misses, investors could be especially picky about the stock — with any weakness prompting them to take their gains and run.

If that happens, it could be the perfect time to get in. Looking longer-term, earnings are expected to grow by 18% per year over the next half decade, and the broader sector is showing strength.

TripAdvisor has notched 22% gains so far this year, although in a bit of a rockier fashion. The company’s Q2 earnings are due out on July 23, with analysts expecting flat EPS on 28% revenue growth. TripAdvisor is also coming off a streak of misses, but is slated for strong long-term growth. Over the next five years, TRIP is expected to grow its earnings by 24% per year.

All in all, online travel is looking solid … but you should still be careful about buying in too high for these sector leaders. If the upcoming earnings reports cause sell-offs, it could be the perfect time to get in on the trend at a reasonable price.

Hilary Kramer is the editor of GameChangers and Breakout Stocks Under $10.

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