The novel coronavirus has made life tough for many stockholders. Perhaps no group has been hurt worse than the travel stocks though.
Unfortunately, it makes sense. Industrials have taken a hit but the group still has products and services that are needed by the world. Many tech stocks have seen a significant boost in demand. Others industries saw demand shut off for a few months, then return later in the year.
In other words, Covid-19 was a one-time event for many companies and an accelerant for others, even though it has wreaked havoc on the world. When it comes to travel though, none of these observations are true.
Almost instantly, travel stocks were sold off as the public pulled in the reins on traveling. Traveling for business was no longer necessary thanks to Zoom Video (NASDAQ:ZM), DocuSign (NASDAQ:DOCU) and Slack (NYSE:WORK). Traveling for fun was no longer safe or in some instances even allowed.
Travel demand has returned to a degree, but it’s nothing like what it once was. However, travel stocks are starting to perk back up now that there are a few vaccines in the works.
The hope is that we’ll be back to regular life before we know it — and this group has been trading like it.
Let’s look at seven travel stocks to buy for 2021:
- Boeing (NYSE:BA)
- Uber (NYSE:UBER)
- Southwest Airlines (NYSE:LUV)
- Delta Air Lines (NYSE:DAL)
- Penn National Gaming (NASDAQ:PENN)
- Airbnb (ABNB)
- Expedia (NASDAQ:EXPE)
Travel Stocks to Buy: Boeing (BA)
Had this gallery come out a few weeks ago, Boeing stock would look like it’s on the cusp of a full-blown breakdown. Fast forward a few weeks and the stock is flying — literally.
The 737 MAX has been grounded for quite some time, as the company works out issues with the plane. That’s the one that had seen several crashes abroad and then was grounded worldwide as a result.
It’s also what crushed Boeing stock from its highs near $435 in the first quarter of 2019. However, the bottom didn’t truly fall out until the coronavirus came along.
Once that happened, the situation became too much for Boeing. Its 737 MAX was its best-selling plane. So the fact that it had become toxic in the public’s eyes created an issue for Boeing. But demand for travel — and thus demand for new jets from airlines — really crushed its business.
Alas, the world will return to a traveling state eventually and thus, air-travel demand will return too. We’re not going to swap out a two-hour flight for a 19-hour train ride across the American Plains. Or going to take a week-long voyage across the Atlantic rather than a six-hour flight from New York to London.
Air travel will return and with it, so too will Boeing. It has a near-duopoly on the market with Airbus. Plus, its 737 MAX just got the green light from the FAA. Things are looking up for Boeing as we approach 2021.
Like others on this list, Uber suffered a major blow from the coronavirus. With less airport traffic, there were less rides into the city. With tourism down, there was less ride-hailing and with offices closed around the world, many employees are working from home.
Luckily, the company has its UberEats business unit, but that’s not a wildly profitable contributor to the bottom line.
Like Boeing though, we will see the return of the ride-hailing customer.
Uber has become a verb/noun — not unlike Googling or Band-Aid. When that happens, more often than not, the brand has serious staying power. It has disrupted the way we get about and that won’t change longer term because of Covid-19.
The recent Prop 22 ruling in California also dealt a huge win to companies like Uber. As a result, they will not have to classify drivers as employees, helping keep operations lean.
In the most recent quarter, the company experienced a 20% decline in overall revenue. However, the 125% gain in Delivery revenue helped offset the 53% decline in Mobility revenue. For now, Uber’s business is struggling, while its stock price is turning higher as investors focus on the future.
Regarding adjusted EBITDA profitability, management said it’s confident it will get there by the end of 2021.
Southwest Airlines (LUV)
Regarded as having the best financials in the airline space, Southwest Airlines is a name investors need to have on their radar.
Of the airline space, Southwest is one of the best-performing travel stocks in the group. Shares are down “just” 19% over the past 12 months and 13.4% this year. Are you kidding me? That’s incredibly good given that most airlines saw revenue fall 90% in the second quarter.
For perspective, of the major airlines, the next best performer over those stretches is down 33% and 34.5%, respectively. That outperformance likely comes from the financials. In its most recent earnings report, management had this to say: “We have strong liquidity, with cash and short-term investments of $14.5 billion as of June 30, 2020; the only investment-grade credit rating in the U.S. airline industry by all three agencies.”
As a result, investors focusing on travel stocks need to have an eye on airlines. Eventually demand will come back and these names will rebound with a vengeance.
Delta Air Lines (DAL)
Curious as to what airline was the next-best performer behind Southwest? Yep, it’s Delta Air Lines.
While the stock performance is trailing Southwest over the past year and in 2020, it’s still leading the rest of the pack by a considerable margin. That “pack” consists of the five largest U.S. airlines.
With Delta down 33% over the past 12 months, the next-best performer is down 46%. On a year-to-date basis, the difference is just as stark. Delta is down 35% in that span, while the next-best stock — Spirit Airlines (NYSE:SAVE) — is down 49%.
The market has spoken and what it’s saying is clear: It values quality.
Delta and Southwest have obviously seen their stocks get buried. That’s not a secret and it’s not surprising. When investment dollars start to flow back into the space, the most beaten down names might fly the highest.
But it may be worth focusing on quality too, as LUV and DAL are likely to rebound hard, but we all know the recovery won’t be a straight line.
Penn National Gaming (PENN)
When it comes to travel stocks, Penn National Gaming is not the first thought that comes to mind. However, the company operates in a key travel-oriented destination: Casinos.
The company operates more than 40 casino and race tracks throughout North America. Many operations are under the Hollywood name, but assets also include Greektown Casino-Hotel, Tropicana Las Vegas, The M Resort, Margaritaville Resort Casino and more.
However, Penn should be on investors’ radar for two reasons: A pandemic rebound play and diversification into online revenue.
The first catalyst is obvious. A rebound in travel will result in a rebound for casino traffic. The more people coming to Vegas or hitting a weekend at their local casino, the better it is for Penn and the industry.
However, the company’s digital transformation shouldn’t be ignored. Earlier this year, Penn took a notable stake in Barstool Sports. That will help drive revenue, but it also gets Penn a leg-in to the online sportsbook business. That unit has secular growth potential as more and more states legalize online sports gambling, and for that matter, online gambling in general.
While the transaction came at a bad time and Penn was left in a liquidity-scare situation earlier this year, management has taken big steps to shore up the balance sheet. With a liquidity event off the table and with long-term growth potential, Penn is one of our travel stocks to keep an eye on.
Now this will be an interesting IPO to watch, with Airbnb reportedly eyeing a December debut in the public markets.
Not only has this been a long-awaited IPO from the public, but like Uber, Airbnb has become somewhat of a noun/verb. Despite the bumpy travel industry right now, I would expect this IPO to have strong demand. If not, I view that as a possible opportunity.
In its most recent update, Airbnb reported a revenue decline of 18% for the third quarter. However, that 18% dip in sales is far better than the 72% decline it saw in Q2. In that quarter, the company also had to raise $2 billion in high-interest debt and lay off a quarter of its staff.
There is a silver lining, though. Which is the sequential improvement Airbnb saw in Q2 to Q3. Other travel stocks haven’t seen that type of improvement and it’s encouraging for the company’s longer term trajectory. Another silver lining is that Airbnb actually turned a profit last quarter, generating income of $219 million.
While customers opted to avoid the big cities and flying to new destinations, they still rented places closer to home and in more relaxed settings. For Airbnb, this is a huge win, as it can maintain its business in all sorts of environments.
Let’s look for this IPO to be a long-term winner.
Expedia is a bit more controversial when it comes to travel stocks. Like Airbnb and the airlines, the second quarter was painful to a record degree. Unlike Airbnb though, its quarter-to-quarter developments haven’t been as positive.
In Q2, revenue fell 82% to $566 million. In the most recent quarter, revenue of $1.5 billion was down 57.7%. While obviously a big improvement sequentially, a more than 50% decline in sales is a tough pill to swallow.
In a crazy observation though, the stock is already back to its 2020 highs. This is golden proof that the stock market is a forward-looking mechanism. It doesn’t care that revenue is down 50% this quarter. It cares about what revenue will be in Q1 and Q2 of next year. The market cares about what type of pent of demand Expedia will realize once a vaccine is being distributed throughout the world.
Perhaps the stock will be out of gas when the eventual rebound in travel comes to be. However, I think on a dip, Expedia could be a good scoop-up for investors. Plus, more positive vaccine news will act as a catalyst for this name.
On the date of publication, Bret Kenwell held a long position in BA and DOCU.