The White House shocked the world last week. President Donald Trump and First Lady Melania Trump had contracted the novel coronavirus. On Friday, journalists found out that other Washington insiders, including senators and presidential aides, had also tested positive. This, not surprisingly, has thrust Covid-19 back into the spotlight.
While case counts have been falling in the United States, the virus has continued to remain a major hazard in Europe and South America, among other locales. In fact, major European cities such as Madrid have been going into lockdown again to slow the spread.
Thus, investors have to grapple with what happens to economic recovery stocks. There had been steady, if subdued, recovery in many economic statistics related to travel, shopping and going out. These figures could go into a tailspin now. And the timing on this latest coronavirus flare-up is particularly poor: People are making their holiday plans right now. This renewed focus on the virus could cause companies reliant on holiday revenues to fall badly short of expectations. That would turn those equities into very risky stocks.
With all that in mind, which stocks will fare alright, and which will suffer from the new round of virus worries? Here are seven risky stocks that are in for a rough end to 2020:
- Norwegian Cruise Lines (NYSE:NCLH)
- United Airlines (NASDAQ:UAL)
- Vail Resorts (NYSE:MTN)
- Dave & Busters (NASDAQ:PLAY)
- Live Nation (NYSE:LYV)
- Simon Property Group (NYSE:SPG)
- Ventas (NYSE:VTR)
Risky Stocks: Norwegian Cruise Lines (NCLH)
The Covid-19 crisis has been a devastating blow for the cruise line industry. While some travel and experiences stocks are starting to recover, it will be awhile until cruises get back to normal. It is just not an easy sales pitch going on a boat in cramped quarters for a week or two given how infectious the virus is.
By no means will the whole cruise ship industry go bust during this downturn. But at a time like this, where profits will be minimal for at least the next year or two, balance sheets are of the utmost importance. As such, Carnival (NYSE:CCL) is the safest bet. That firm managed to raise a great deal of money early on into the crisis, securing its liquidity to make it through this mess.
Norwegian, by contrast, faces a much more turbulent outlook. Simply put, Norwegian’s financial situation doesn’t appear to be strong enough to survive an extended shutdown. And with Covid-19 continuing to cause major havoc, the timeline for a return to normalcy keeps on slipping. InvestorPlace Markets Analyst Thomas Yeung has the full details on Norwegian’s financial situation. His conclusion is sobering: NCLH stock could go to zero due to its excessive debt.
United Airlines (UAL)
Airline stocks in general — and United in particular — have been largely flat since June. Once the favorites of Dave Portnoy and other influential traders, the sector has lost some steam since then. And understandably so.
That’s because the U.S. is not seeing a V-shaped recovery in air traffic demand. United, for example, is back to flying just 40% of its usual capacity for the month of October. That, in turn, is only up modestly from September. Long story short, it has been a slow rebound, making airlines risky stocks.
At this point, the best hope for the airline industry is more government bailouts. Watching the trading action recently, the airline stocks really only move when the politicians offer an update on the next stimulus package. Needless to say, when your company is running mountains of red ink and relying on government dole for near-term cash flow, the situation is not good.
Perhaps once a vaccine is finally on the market, airlines will be able to stand on their own. But we’re not there yet. And United, with its mediocre balance sheet, is at real risk of having to dilute shareholders dramatically if more government aid doesn’t come through. Risk is tilted toward the downside on UAL stock for the time being.
Risky Stocks: Vail Resorts (MTN)
Colorado-based ski resort operator Vail Resorts has had a wild year. Shares came into 2020 with a huge valuation and looked massively overpriced. The March crash fixed that, as MTN stock dropped 50%. However, shares have nearly recovered all their losses. That’s a mistake. While the company will still have a reasonable amount of business, the pandemic is a major disruption to a company whose stock was already much too steeply priced. How bad will the pandemic be for Vail?
While Vail is trumpeting that pass sales are down just 4%, consider a few things. For one, sales are up for people that live locally and can drive, while guests planning to fly to Vail Resorts properties are trending lower. In particular, Vail has its world-class Whistler Blackcomb Resort in Canada. Whistler relies on international tourists for half of its arrivals.
Whistler, you may recall, is where Canada last hosted the Winter Olympic gains. So Vail is getting more traffic from, say, Denver to its Colorado resorts, but losing the travelers that would fly into the trophy properties such as Whistler and spend thousands of dollars. This is a terrible trade-off. Vail Resorts is likely to earn far lower profit margins this year as its customer mix shifts toward a more frugal group of consumers.
This is even assuming no second wave of Covid-19. If the virus comes on strong again and Colorado or other key states limit tourism, it could be a devastating blow. This is all survivable — Vail’s balance sheet is alright and the winter season should be decent given the pass sales. But the stock is only down 5% over the past year. It is one thing to say Vail will be fine in the long run. But for a levered high fixed-cost business like this, having a down winter season should cause a significantly larger impact on the stock price.
Dave & Buster’s (PLAY)
Entertainment-based restaurant chain Dave & Buster’s looked like a promising concept. But Covid-19 has absolutely crushed the firm, and things are getting shakier now. CFO Scott Bowman sold 6,600 shares of PLAY stock in September. Shortly thereafter, reports surfaced that Dave & Buster’s might be looking into a bankruptcy reorganization filing. Needless to say, this combination of events is not reassuring.
To be fair, it seems unlikely that Dave & Buster’s is actually going to go bankrupt. Often that sort of chatter can be a bargaining chip to extract concessions from landlords and suppliers. Dave & Buster’s seems to have enough cash to avoid an immediate game-over outcome. Still, Dave & Buster’s was going to have a slow turnaround regardless. Few restaurant chains are less appealing than ones involving germ-covered gaming machines at the moment.
This simply isn’t a business model apt to work in a Covid-19 world. And with the company facing specific financial strain, there’s really no reason why traders should be playing with this stock. There are far better options in the restaurant and hospitality space.
Sometimes traders try to get too cute. But don’t overthink this. If you’re buying a restaurant stock, you don’t want the one that is most prone to potential coronavirus infections going forward.
Risky Stocks: Live Nation (LYV)
Next on this list of risky stocks is Live Nation, a group of various entertainment-related properties. The most famous brand is probably Ticketmaster, which provides box office services for concerts, sporting matches and other such events. There are numerous other businesses related to hosting and operating live events, and selling sponsorships for those.
Needless to say, this is a difficult business to be in right now. Many professional sports leagues are playing again, but they are doing so with tiny, socially distanced crowds. Some have no in-person audiences at all. As for concerts, there is essentially nothing moving on that front until 2021. While Live Nation has a somewhat diversified business in normal times, virtually everything has shut down due to the pandemic.
That would be fine if LYV stock were down in accordance with the losses the company is facing. But shares are only down 21% over the past year. That’s crazy. Analysts see Live Nation losing $7.53 per share this year and barely getting back to breakeven in 2022. This was not a highly profitable business even prior to the pandemic, and it faces several years of lost time going forward. Shares should be down much more, particularly as Covid-19 is ramping up again.
Simon Property Group (SPG)
It’s no secret that brick-and-mortar retail was in trouble well before the pandemic. More and more retail transactions occur online every year. And many categories of mall retail, such as apparel, media and electronics, have gone primarily to the internet. This has been a difficult transition period for mall owners like Simon Property.
Then the virus compounded this, both by making it difficult to physically go to malls, and also incentivizing shoppers to become even more dependent on the internet. Mall owners have had to make tough choices. Simon, for example, is dealing with many tenant bankruptcies by acquiring ailing retailers. This keeps mall space occupied, but exposes Simon to the difficulties of running declining retail businesses during a recession.
More broadly, malls face a difficult future. The internet has done a number on physical commerce. Brick-and-mortar bulls like to point out that only 16% of sales occurred on the internet prior to the pandemic. However, those figures include grocery, gasoline, pharmacy sales and other things that rarely are sold over the internet. The key mall staples are thinning out. Malls have tried to pivot by moving to more entertainment tenants, such as Dave & Busters. But those come with their own risks, as we are seeing now.
To the extent that people do still want to buy things in person, malls face more problems. The decline of the American mall was already underway as people chose to move much of their shopping to big-box stores such as Costco (NASDAQ:COST). That was a blow. Now you have the new outdoor lifestyle centers that are more glamorous than indoor malls.
Long story short, Simon has aging out-of-fashion malls with struggling tenants in the grips of a recession. The dividend has already been slashed and this holiday season will be especially difficult thanks to Covid-19. Steer clear of Simon and other mall owners for now. They are risky stocks.
Risky Stocks: Ventas (VTR)
Sticking with real estate investment trusts (REITs), healthcare property owner Ventas is another clear name to avoid. At first glance, you might think Ventas would be in fine shape. After all, a pandemic places more emphasis on the need for well-maintained healthcare facilities.
Unfortunately, Ventas does not have the right sort of assets for the current situation. In fact, Ventas has a large exposure to senior housing facilities. These are at additional risk now because if the virus spreads within these facilities, it can cause legal liability for the property owner. And, at a minimum, it increases the cost of cleaning and preventative measures to keep these facilities safe and sterile.
Ventas has been hit on a variety of fronts. Occupancy — how many of its rooms are full — has plunged in 2020. And some of the operators that lease Ventas’ facilities are struggling. Ventas had to recast a deal with operator Brookdale at a sharply lower rent rate, which will hurt its cash flow and earnings going forward. Ventas had to trim its dividend earlier this year thanks to its falling forward outlook. Yet, despite that, shares are almost back to pre-pandemic levels. With the virus still on the move and Ventas having to cut rents, shares are overvalued and vulnerable to downside risk here.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.