Wall Street Week Ahead: Investors look for buys as virus fears crush
travel stocks
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[March 07, 2020]
By David Randall
NEW YORK (Reuters) - Bargain-hunting
investors are eyeing the shares of airlines, hotels, cruise lines and
other companies that have been among the worst-hit by the coronavirus
outbreak.
The recent declines have brought down the valuations of travel and
leisure-related companies to levels some investors are believe are
attractive. American Airlines Group Inc <AAL.O>, for example, now trades
at a forward price-to-earnings ratio of 3.3, compared to 5.4 at the
start of the year. Marriott International <MAR.O> trades at 17.6
compared to 23.2, while the forward price for Carnival Corp <CCL.N> has
fallen to 6.4 times forward earnings from 11.6 at the start of the year.
Few believe these companies are in the clear, as the outbreak continues
to accelerate beyond China’s borders to the United States and other
countries. On Friday, Reuters reported that U.S. officials are
considering ways to discourage U.S. travelers from taking cruises.
Shares of Carnival Corp hit an 11-year low, while shares of Royal
Carribbean touched 5-year lows.
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Yet the sharp decline in stocks tied to tourism and leisure in the wake
of the virus’ spread has pulled down valuations in the battered sectors
and attracted the attention of investors looking to take advantage of
recent market declines.
Noah Hamman, chief executive of Advisorshares, an investment firm that
focuses on actively-managed exchange-traded funds, is adding to
positions in airlines that focus on regional and domestic travel, such
as Hawaiian Holdings Inc <HA.O> and SkyWest Inc <SKYW.O>, a bet that
these carriers have better prospects of surviving a travel slowdown
because they are more often used for regional and domestic trips.
At the same time, he is short shares of American Airlines, which has a
greater reliance on revenue from international travel. Shares of the
company are down nearly 43% for the year to date.
"Those smaller regional carriers we think can weather the storm quite a
bit more … but the big carriers we think will continue to struggle," he
said.
The International Air Transport Association said Thursday that the
coronavirus outbreak could slash up to $113 billion in airline revenues
this year, an estimate more than 3 times greater than its projections
from two weeks ago. Budget carrier Southwest Co <LUV.N>, meanwhile,
predicted up to a $300 million hit from first-quarter revenues.
Investors in the coming week will be looking for signs of how much the
virus' spread has accelerated in the United States and other regions.
Sectors hard hit by the outbreak are likely to join a broader market
selloff if it appears the outbreak is spreading faster than expected.
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Test tube with Corona virus name label is seen in this illustration
taken on January 29, 2020. REUTERS/Dado Ruvic/File Photo
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Bond yields plunged and U.S. stock futures were down sharply on
Friday morning as heightened fears about the economic damage from
the coronavirus epidemic drove investors to perceived safe havens
such as Treasuries and gold.
Jamie Cox, a financial advisor at Harris Financial, remains bullish
on the shares he owns of Delta Air Lines, a bet that consolidation
in the industry has reduced the number of competitors and will allow
airlines to weather a slowdown in traffic without cutting their
prices in a bid to lure back customers.
“If you want to be able to travel, you have to use these carriers
because there are so few of them," he said.
He’s far less optimistic on a rebound in shares of cruise companies,
some of which have dropped by 50% or more since the start of the
year.
News reports about coronavirus outbreaks on ships like the Diamond
Princess--a vessel owned by Princess Cruises that was moored in
quarantine for two weeks off the coast of Japan in February - will
likely weigh on investment sentiment toward these companies, he
said.
"People are going to remember the Diamond Princess a lot longer than
they will that airlines canceled flights to China," he said.
Not all investors are ready to jump in.
Brian Frank, portfolio manager of the Frank Value Fund, said that
cruise liners and airline companies would need to fall by another
50% or more for them to become attractive given the fact that they
were trading at near-record valuations before the coronavirus
outbreak.
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His fund has built up about 60% of its portfolio in cash and he is
waiting for further declines before buying, he said.
"There's no shortage of great companies, just a shortage of good
valuations," he said. "We're ready to start buying if coronavirus
gets bad and we go into a recession."
(Reporting by David Randall; Editing by Ira Iosebashvili and Nick
Zieminski)
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