The reasons behind the August market meltdown are numerous and are already moving into the rearview mirror of investors. A coolish reading in the July producer price index (PPI) has investors putting their foot on the gas to get ahead of the Federal Reserve cutting interest rates. It’s also a reason to consider investing in travel stocks.
One rate cut, even if it’s one of 50 basis points, which the experts seem to favor, won’t do much to relieve pressure on consumers right now. But the markets are forward-thinking. And that means considering areas of the economy that may start to post strong growth in a quarter or two.
In the last quarter or two, many of the top names in the travel sector are falling victim to weaker consumer spending. Lower interest rates may cause the price of some travel-related products and services to rise, but that may be offset by a lower cost of borrowing. It still pays to be selective, but here are three travel stocks to consider if you’re looking for a comeback story.
Hyatt Hotels (H)
Hyatt Hotels (NYSE:H) is one of the more attractive hotel stocks in any economy. The company has successfully pivoted to an asset-light business model that is helping boost earnings and reduce capital expenditures. That was evident in the hotel giant’s second-quarter adjusted earnings, which showed a 78% year-over-year (YOY) increase in earnings per share.
The company hasn’t needed much of a lift. By the middle of 2022, the luxury hotel chain was posting revenue back at 2019 levels. And despite tough comparisons, Hyatt continues to deliver strong revenue and earnings. The dividend is also nearly back to 2019 levels.
H stock fell in advance of its August 6 earnings report as investors mulled recession fears. A slight miss on revenue may put a low ceiling on the stock in the short term. However, since the earnings report, analysts have continued to issue price targets for the stock that are higher than the consensus target of $159.82.
Royal Caribbean (RCL)
Despite a solid earnings report on July 24, shares of Royal Caribbean (NYSE:RCL) dropped 18% after the report. Fears that the consumer is slowing down and that the economy may be slowing down in the second half caused a broad selloff that didn’t spare cruise lines.
However, there’s reason to believe this is a buyable dip for RCL stock. First, cruising has reclaimed its value proposition for travelers. Even if the Fed cuts interest rates as expected, consumers are likely to be on the hunt for value. And with ships such as its Icon of the Seas, the cruise line operator is showing how it’s reinventing the concept of a floating city.
Also, the company’s financials are solid. The debt-to-equity ratio of 3.52 is higher than you’d like, but it’s not terrible, particularly when you consider the entire industry took on significant debt in 2020. Plus, the company increased liquidity in the quarter to $3.8 billion.
Finally, Royal Caribbean has an attractive valuation at 12.48x forward earnings. And the company expects earnings growth of more than 13% in the next 12 months.
Expedia Group (EXPE)
Expedia Group (NASDAQ:EXPE) is down 14% in 2024. However, that includes a peak-to-trough drop of about 30% from February to June. The first leg down was easy enough to understand. The company’s fourth-quarter earnings showed a sharp YOY decline. But the second leg down in May came after the company reversed that trend.
There may have been two reasons for that. First, the company’s guidance was weaker than expectations, and second, investors may have been expressing a wait-and-see posture regarding the company’s new CEO.
Expedia straddles the line between travel stocks and technology stocks. That makes its forward earnings of 11.4x highly attractive. However, the company needs to show it can gain market share when it competes with established names like Booking Holdings (NASDAQ:BKNG) and Airbnb (NASDAQ:ABNB).
The good news is that EXPE stock seems to have found a bottom. What remains to be seen is how high the ceiling may be. Analysts are raising their price targets, and if lower interest rates prove to be a tide that lifts the sector, EXPE stock could be a gem lying in plain sight.
On the date of publication, Chris Markoch 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
