Last November’s game-changing novel coronavirus vaccine news helped to boost travel stocks across the board. But, with the rollout of vaccines taking longer than expected, economic experts across the globe are starting to walk back prior outlooks for when (and to what extent) things overall will recover in 2021.
Yet, despite the likelihood “return to normal” won’t happen as quickly as previously anticipated, many stocks in the airline, cruise line, gaming, hotel and travel booking sectors are priced as if a recovery is just around the corner.
Sure, the situation for the travel economy isn’t as dire as it was at the height of lockdowns last spring. But, with a rapid recovery more than priced-in, any sort of delay, hiccup, or setback in controlling Covid-19 could result in a big sell-off for richly-priced names in this sector.
So, which travel stocks should you stay away from for now? Consider these eight overvalued names to avoid:
- American Airlines (NASDAQ:AAL)
- Airbnb (NASDAQ:ABNB)
- Carnival (NYSE:CCL)
- Delta Air Lines (NYSE:DAL)
- Expedia Group (NASDAQ:EXPE)
- Hyatt Hotels (NYSE:H)
- Hilton Worldwide (NYSE:HLT)
- Las Vegas Sands (NYSE:LVS)
Travel Stocks: American Airlines (AAL)
If you’ve read my prior analysis of AAL stock, you know how I’m skeptical this airline will come out of the pandemic relatively unscathed. Namely, due to its debt position ($41.2 billion), which is high (even for a legacy carrier).
As I mentioned above, air travel demand has picked up from the record lows seen at the height of lockdowns. But, U.S. domestic passenger numbers remain less than 40% of pre-outbreak levels. Putting it simply, it’s going to take time for American Airlines to crawl back to its pre-pandemic high-water mark.
However, while AAL stock has not recovered as much as its rivals, at around $17 per share, investors may be pricing-in too rapid of a recovery. Those buying at today’s prices could see big gains if shares eventually get back to where they were before the outbreak (around $30 per share). But, don’t bank on that happening within the next year.
Even if air travel demand fully bounces back within the next year, it’s still at a disadvantage. High debt and a bloated cost structure will continue to hurt the company long term. That’s not to say American is going bankrupt, thanks to its capital raises and last year’s bailout. But, in terms of additional gains from today’s prices in the near term? Don’t hold your breath.
Airbnb (ABNB)
As I put it on Jan. 18, ABNB stock has soared to an unsustainable valuation. Sure, it makes sense why investors were overly excited to buy into this recent IPO. But, with shares priced as if Covid-19 is fully in the rearview mirror, those paying up for this leading hospitality app could see big losses if the coming months indicate a longer-than-expected recovery mode for the travel economy.
But, besides not being a great stock to buy as a short-term investment, shares at today’s prices don’t look appealing either as a long-term buy, either. Why? Yes, analyst projections call for revenue to grow rapidly through the 2020s, eventually reaching more than $21 billion by decades’ end.
Yet, a lot could change between now and then. Given Airbnb won’t hit its revenue high water mark again until 2022, it’s uncertain whether it can still scale up as quickly as bullish estimates project. With plenty of hurdles to climb in the near term, shares could underperform going forward, after their strong performance in late 2020 and early 2021.
That being said, given the current short-squeeze friendly enviornment we find ourselves in, watch out betting against ABNB stock. The best move may be to cash out now if you own it. And, stay away (both on the long side, and the short side) if you don’t.
Travel Stocks: Carnival (CCL)
Cruise line operators like Carnival face far choppier waters than other hard-hit segments like airlines. Yet, despite greater uncertainty, investors have overpriced a rapid recovery into this and other major cruise line stocks, like Norwegian Cruise Line Holdings (NYSE:NCLH), and Royal Caribbean (NYSE:RCL).
However, CCL stock may be the one that’s the most overstretched. Why? Although it’s pulled back since its November vaccine rally, at around $19 per share, investors have priced-in a full 2021 recovery. Even as the vaccine rollout faces delays, the cruise ship moratorium remains in place until March 31 and Carnival execs backtrack prior optimism.
Trading at a full valuation, there’s little room for error if things fall short of today’s expectations. Based on recent insider selling, the company’s top execs seem to agree shares have moved up too far, too fast. On Jan. 14, CEO Arnold Donald sold more than $1 million worth of CCL stock. The company’s CFO and general counsel also sold fairly large amounts of stock that day.
Carnival’s ship may not be sinking. But, with cruise line operators faces greater hurdles, skip out on this sector. Other travel stocks may make for stronger Covid-19 recovery plays.
Delta Airlines (DAL)
Delta Airlines may be in a better position than American Airlines. Passenger travel may be recovering fairly well. But, as Cowen & Co. analyst Helane Becker put it, this carrier “is the airline most exposed to corporate travel.
This could mean a possible longer-than-expected recovery for this airline. Yet, that hasn’t stopped investors from being optimistic about DAL stock. The pandemic pushed the stock from around $60 per shares to prices below $18 per share.
But, shares bounced back through the summer and fall, rising back to around $30 per share. And that’s only the start. On the heels of the game-changing news from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA), Delta stock surged above the $40 per share price level. Shares have pulled back since then, and currently trade for around $38 per share.
But, looking at the details, it’s clear Delta still has its work cut out for it. Cash burn has come down, but losses are still between $10 million to $15 million per day. Customer demand this quarter isn’t expected to change much from last quarter. Even as the carrier expects to return to profitability by the summer, high uncertainty remains. Bottom line: those who bought before the vaccine news should cash out. Those who haven’t bought it yet? Stay away for now.
Travel Stocks: Expedia (EXPE)
Valuation-wise, EXPE stock looks reasonably priced compared to its too-hot-to-touch peer, Airbnb. But, with a forward price-to-earnings (P/E) ratio of 63.2, there’s still a substantial growth premium priced into it share price.
The problem? Like Airbnb, Expedia is priced as if the travel economy’s completely back to normal. Not only have shares recovered from their coronavirus crash losses. At about $127 per share, the stock trades above where it was when the outbreak spread across the globe (around $122 per share).
One Seeking Alpha commentator called its strong 2020 performance “last year’s most perplexing rally.” Yes, Mr. Market typically looks to the future when pricing a stock. But, chalk up EXPE stock’s tremendous rebound more to the general market meltup rather than optimism a full recovery is just around the corner.
Sure, bears like myself could be proven wrong if today’s vaccine dysfunction proves to be darkness before the dawn. By the third or fourth quarter of 2021, pent-up demand could help the travel economy rapidly bounce back. But, with this best-case scenario more than priced-in, why take the risk? Look for more reasonably priced travel rebound plays instead.
Hyatt (H)
Back in September, I detailed five hotel stocks that could outlast the coronavirus. This list included leading hotel chains like Hyatt and Hilton (more below). At the time, I saw room for shares to gain further, as the recovery had yet to be fully priced into shares.
But after the strong performance of H stock since then, those gains have already been realized. At today’s prices, investors are overestimating how quickly this full-service hotel franchisor will get back to normal.
Why? Due to this chain’s dependence on the corporate travel market. There’s still concern the new normal of Zoom (NASDAQ:ZM) calls permanently replaces a fair chunk of the in-person meetings and conferences held before the pandemic. This has been a longstanding concern for the airlines. But, such a change could hurt full-service hotel chains like Hyatt as well.
That’s not to say H stock risks falling back to the distressed prices we saw back in March. Far from it. But, in terms of more gains from here? It doesn’t seem too likely. Consider this another overstreteched travel stock to avoid for now.
Travel Stocks: Hilton Worldwide (HLT)
Similar to my lukewarm view on H stock, I have a similar view on HLT stock. With shares now trading near their pre-pandemic prices, investors have really gotten ahead of themselves betting this leading hotel franchisor will fast return to normal.
Granted, the situation with Hilton may differ from the situation with Hyatt. While Hilton is mainly known for its higher-end, full-service brand, the company also owns budget brands like Garden Inn and Hampton. This may make it easier for the company overall to recover, as well as for its stock to hold recent gains.
But, additional moves higher from here? That may not be in the cards. Priced at 51.5x estimated 2021 earnings, this isn’t the cheapest hotel stock. You can buy budget-oriented hotel franchisors (which likely will recover faster) like Choice Hotels (NYSE:CHH) and Wyndham Hotels & Resorts (NYSE:WH) at lower forward multiples (31.5x and 26.7x, respectively).
Simply put, why buy HLT stock, when there’s more reasonably priced hotel recovery plays out there? Keep this in mind before diving in at today’s prices (around $105 per share).
Las Vegas Sands (LVS)
Thanks to the online gambling megatrend, casino stocks in general have held up well through the pandemic. But, unlike its rivals like Caesars (NASDAQ:CZR) and MGM Resorts (NYSE:MGM), this operator of casino properties in the U.S. and Macau doesn’t yet have an online presence to fall back on.
Instead, those buying LVS stock today are largely betting that Macau (China’s answer to Las Vegas) recovers from its massive 2020 declines. Despite its name (and its two properties on the Las Vegas strip), the lion’s share of its business is located in the Asian gambling destination.
Granted, unlike some other travel stocks, Las Vegas Sands anticipates getting back to profitability by 2021. But, with projected earnings-per-share (EPS) of 1.21 per share, it’s still a long road ahead until the company gets back to its pre-outbreak earnings levels (2019 EPS of 3.50).
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Bottom line: I’m skeptical LVS stock can continue climbing back from today’s prices (around $50 per share), back to prior highs (above $70 per share). Admittedly, given it lacks exposure to sports betting/iGaming, the stock isn’t nearly as overstretched as say, Penn National (NASDAQ:PENN). But, with still too much optimism priced in, it’s best to sit this one out as well for now.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
