For nearly a year, when it came to the novel coronavirus, there have been multiple divisions in America. Now that the nation looks poised to be (mostly) on one page regarding the coronavirus, many cyclical stocks, especially those in the travel sector, look positioned to get a big lift.
Until very recently, there were important divisions among states and consumers. And in the travel sector, there was a sharp contrast between business travel and leisure travel.
In general, the economies and schools of so-called red states were opened, while many schools and businesses in blue states remained fully or partially closed. Most consumers who had received vaccines were no longer afraid of going back to their pre-pandemic lives, but some were still fearful. And while leisure travel had bounced back dramatically, business travel remained depressed.
I believe that the May 14 announcement by the Centers for Disease Control and Prevention, as well as President Joe Biden saying that vaccinated people no longer have to wear masks, will largely end those divisions. To most Americans, the announcement will show that those who have received vaccinations no longer have to worry much about the virus.
Lior Rennert, assistant professor of biostatistics in the Department of Public Health Science at Clemson University, wrote in an email to InvestorPlace that, “Fortunately, we are at a point now in the United States where we will soon have a surplus of the Pfizer and Moderna vaccines. … Furthermore, all vaccines have proved to be highly effective against severe infection. Therefore, we should not expect many lockdowns this year.”
“Starting this summer, the EU will allow fully vaccinated American tourists to visit,” he further wrote. “However, it is not yet clear which countries will still have strict lockdown measures. The good news is that all vaccines have proven to be highly effective in preventing severe SARS-CoV-2 infections. Therefore, we should expect to see an increase in travel among those vaccinated in the coming months.”
Indeed, since Biden and his administration are seen as extremely cautious about the coronavirus and are trusted by most of those who were afraid of the illness, the proclamation will act as an “all-clear” sign regarding the virus. Further, most of the adults who haven’t received a shot probably are not scared of the coronavirus.
Consequently, schools and businesses are going to open across the country. Fear of travel will decline. With most of their employees no longer afraid of traveling, companies will be able to send their sales teams and executives on trips again.
All of this, of course, is great news for cyclical stocks in general and travel stocks in particular. Three of the best consumer cyclical plays on the (very welcome!) “end of the end” of the pandemic in the U.S. are:
Cyclical Stocks: Hyatt Hotels (H)
Encouragingly, on Hyatt’s first-quarter results conference call, CEO Mark Hoplamazian said, “The pent-up demand for travel is immense. And with the number of fully vaccinated potential travelers growing by the millions each day, we feel we’re at the beginning of a growing level of demand for our hotels.”
Further, the hotel operator’s revenue per available room (Rev PAR) increased 54% in March versus January, compared with the usual seasonal gain of about 25%. Powered by strong spring break demand in the U.S. and relaxed travel restrictions in China, leisure travel led the way. And in the second “half of March,… leisure transient room nights for comparable hotels surpassed levels during the same period in 2019,” Hoplamazian said.
Hyatt’s focus on high-end consumers is positive because white-collar workers tended to have been largely unaffected financially by the pandemic. Moreover, upper-income consumers are less likely to be hurt by inflation than people with lower incomes.
Finally, Hyatt should get much more of a boost from the return of business travel than lower-end hotel chains.
The company’s Q1 results showed that its business already began rebounding meaningfully last quarter. as its sales jumped to $1.25 billion versus $920 million in Q4. What’s more, Expedia’s Q1 bookings dropped just 14% from the previous year, and its top- and bottom-line results came in well above analysts’ average outlook.
Speaking on the company’s Q1 earnings conference call, CEO Peter Kern said that “the summer looks strong,” setting up EXPE stock to continue performing well over the next few months. He added that “the (booking) trends are very good, and we’re excited about that.”
In recent weeks, a number of analysts have been very bullish on Expedia. On May 3, for example, Wells Fargo named the shares as one of its “signature picks” in the consumer discretionary category. UBS on April 26 identified Expedia as a company whose “strong pricing power” should enable it to outperform other stocks even as inflation rises.
Given its high market share and strong brand, Expedia is positioned to benefit tremendously from pent-up demand in the travel sector.
Cyclical Stocks: American Airlines (AAL)
On April 22, American Airlines reported that it expects its Q2 capacity to drop 20% to 25% from 2019 levels, amid “signs of continued recovery in demand.” The airline expects to end Q2 with a robust $19.5 billion of liquidity.
And supporting my thesis on business travel returning, American says it is seeing early signs of a rebound in that category, saying that “small business demand, which was roughly 17% of our system revenue, has been improving steadily as vaccination rates have increased and as markets reopened.”
With small business travel accounting for 17% of AAL stock’s revenue, the company is positioned to benefit from a much bigger comeback of business travel.
On April 23, Raymond James raised AAL stock to “market perform” from “underperform,” citing improved profitability and a better risk-reward ratio.
Unlike some of its peers, AAL stock remains well below its 52-week high and its 2019 levels, indicating that it has a great deal of room to rally.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.