As seen from booming travel numbers over the July 4 holiday, it’s clear that it’s not just hype that’s fueled a reopening rally for travel stocks. After getting hammered at the onset of the Covid-19 pandemic, major stocks in the airline, casino, cruise line, and hotel industries have bounced back tremendously from their lows…
Things are seemingly getting back to normal. But, the travel economy may not be out of the woods just yet. In the months ahead, it all comes down to whether the outbreak of the Covid-19 delta variant gets worse. The variant has so far spread to more than 90 countries, including the U.S.
Since it began making headlines, travel stocks pulled back slightly. But, for the most part, investors have shrugged off this concern. Mostly, due to the belief that the current crop of vaccines from Johnson & Johnson (NYSE:JNJ), Moderna (NASDAQ:MRNA), and Pfizer (NYSE:PFE) will contain this new outbreak.
Yet, millions in the U.S. are not vaccinated. There’s also uncertainty over the effectiveness of the current vaccines against this variant. Travel stocks, still priced based on pent-up demand, and a fast return to normal may be in for big declines in the second half of 2021. So, ahead of possible continued pullback, which travel stocks should you take profit on? It may be high time to cash out if you own any of these seven vaccine recovery winners:
- American Airlines (NASDAQ:AAL)
- Airbnb (NASDAQ:ABNB)
- Caesars Entertainment, Inc. (NASDAQ:CZR)
- OneSpaWorld (NASDAQ:OSW)
- Marriott International (NYSE:MAR)
- MGM Resorts International (NYSE:MGM)
- Royal Caribbean (NYSE:RCL)
Travel Stocks: American Airlines (AAL)
It fell from around $29 per share to single-digits when the outbreak first hit. But, AAL stock has seen a solid rebound since the vaccine rollout late last year. As things have gradually gotten back toward normal for air travel demand, shares more than doubled between November 2020 and March 2021.
Since then, shares have traded sideways. Yet, don’t view this as an opportunity to “buy the pullback” prior to American Airlines making a full recovery to its pre-outbreak price levels. Why? For starters, rival legacy carriers appear to be much stronger opportunities.
Analysts at Jeffries pointed out Delta Airlines’ (NYSE:DAL) continued recovery prospects. United Airlines (NASDAQ:UAL) expects to return to profitability this month. In addition, American Airlines faces headwinds related to its over-leveraged balance sheet. As InvestorPlace’s Tom Kerr wrote June 29, the carrier’s debt position (including lease liabilities) soared from $33.4 billion to $41.4 billion during the pandemic. Even if its business returns to pre-pandemic levels in the next two years, the stock price today may more than account for it.
And, that’s assuming the delta variant doesn’t slow things down a bit. With its debt-laden balance sheet giving it little room for hiccups, investors who bought AAL stock near its bottom may want to take the money and run, as it trades for around $21 per share.
Going public at the start of the vaccine recovery, Airbnb shares skyrocketed from its IPO price of $68 per share to prices well over $200 as travel stocks became overheated. However, since the spring, things have cooled down a bit, with the stock now trading for around $146 per share.
This happened for several reasons. As I broke it down on May 28, much of its decline had to do with its status as a “meme stock”/Reddit stock. When this trend cooled, so did ABNB stock. The selloffs in tech-based names due to inflation/interest rate worries, as well as the impending expiration of its insider lockup period, also played a role.
Yet, even at lower price levels, you could still call Airbnb a priced for perfection stock. How so? Trading for a rich multiple (13x) of its projected 2022 revenues, the company needs its sales to not only get back to its pre-outbreak high water mark ($4.8 billion), but hit levels substantially above that, just to meet expectations.
As recent travel numbers have shown, this may be attainable. But, if the delta variant leads to another big change in the world’s travel plans? Still-overvalued ABNB stock could be a risk of a massive correction.
Travel Stocks: Caesars Entertainment (CZR)
Casino stocks like Caesars have performed well over the past year for two reasons. First, with the rapid expansion of online gambling in the U.S., names like this one, MGM (more below), and Penn National (NASDAQ:PENN) saw their shares rebound strongly. Even as their land-based operations remained in limbo.
Second, the vaccine rollout, and the return of business as usual for regional casinos, as well as tourist-oriented casinos in Las Vegas. As a result, CZR stock not only made up for its pandemic losses. It now trades at prices over 40% above pre-outbreak levels. This may signal…
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