Travel. Ask any random person if they like to travel, and undoubtedly most will say “Oh yes, absolutely!!”. Then after some careful thought, they’ll hedge that claim with “…but I probably won’t do a lot of traveling right now“.
Travel used to be a pretty big chunk of the average consumer’s budget. Now, with quarantine periods for international travelers and “stay home” orders in-place, most families are simply sticking to home. They’re probably watching too much TV, and working on home improvement projects with supplies from Home Depot (Symbol: HD) and Lowes (Symbol: LOW).
This is one of the reasons why I recently invested money into Home Depot (in March) . Changing consumer behavior can create dramatic changes in profitability, or even alter how the stock market values a particular class of stocks. If you can identify these areas of great behavioral change, they can make for excellent stock investments.
But I digress! Let’s get back to travel…
While the airlines are still flying, prices seem higher than normal. The number of flights is also WAY down compared to pre-COVID-19. Add to that the risk of catching a nasty virus, and I can’t blame people for wanting to stay home.
People still love to travel, but attitudes have shifted to focus on more local travel.
Recently I put up a poll on twitter, asking what kind of vacationing activities families were planning this summer. The results were surprising:
As you’d expect, very few people want to fly right now! Staycations and Road-trips were by-far the most popular poll answers, consuming 74.4% of the votes.
Summer Road Trips
Summer road trips used to be a real staple of American family life. Like burgers and apple pie. During my childhood, my own family would go on these cross-country driving trips (back in the 1980’s and early 1990’s). Every year, after we got out of school for summer, the family would all cram into the car and trek around the country’s highways and byways for a few weeks.
It was good family fun, and a great way to escape from regular life. Most important to my parents, it was a way to travel affordably.
With 13% of the U.S. population unemployed right now, affordability is going to be key in how people spend disposable income this year. Rather than indulging on a multi-thousand dollar beach vacation to Fiji, shorter and more affordable travel is likely to make a big comeback.
Is 2020 going to be the year of the summer road trip? Quite possibly! I know the Tako family is limiting our summer to road trips and local day-trip activities. It stands to reason that other families will make similar “adjustments” this year.
On one hand you have people itching to get out of the house after being cooped-up for the last three months (I know I’m ready!). Then, you have very cheap gas prices at the pump — largely due to a shuttered economy.
It’s the perfect setup for affordable summer road trips, and local “staycation” style activities.
Who Benefits From More Summer Driving?
As an investor, I’m always looking at human behavior through my investing lens. When human behavior starts to change rapidly, it’s time to stand-up and take notice! Opportunities abound in situations like this!
Ask yourself: Who benefits from the change? And how will this change cause a change in how money flows through the economy?
At first glance, it’s easy to assume refineries would be the beneficiaries of this new trend toward staycations and road trips. With oil being a cheap commodity, it stands to reason that consumers will begin driving more as the economy unlocks. Refiners like Marathon Oil (Symbol: MRO), Philips66 (Symbol: PSX), and Valero Energy (Symbol: VLO) would be the obvious beneficiaries of consumer driven demand for additional gasoline, right?
Unfortunately refining is NOT a simple business. I’m no chemical engineer, but my understanding of the crude oil cracking process tells me that refiners can’t just ramp up refining of gasoline without ramping the production of other fuels (like jet kerosene or diesel). This is won’t be a great time for refining stocks because of poor margins in ancillary chemicals.
This is probably a good sector to avoid for the time being.
What About Hotels?
With more people “road tripping” instead of flying, roadside hotels could be one of the first areas in the lodging sector to see a recovery.
Unfortunately investing only in roadside hotels is easier said than done. Most hotel chains are heavily consolidated and own dozens of different hotel brands. In my opinion, your best bet for investing in the recovering hotel sector might be Wyndhamm Hotels & Resorts (Symbol: WH).
Supposedly 87% of Wyndhamm’s U.S. hotels are in “drive-to” locations close to highways. With budget friendly brands like Super 8, Days Inn, and Travelodge under the Wyndhamm corporate umbrella, Wyndam Hotels & Resorts is a solid choice for a family traveling on a budget.
My biggest concern with Wyndhamm would be it’s debt levels — they’re higher than what I normally choose to invest in. Real estate is usually quite heavily leveraged, so Wyndhamm isn’t outstandingly bad in this regard.
That’s not to say that higher debt levels make this investment an absolute ‘NO’. Just look at it as a warning flag. That flag means “be careful” and try to deeply understand the cash flow situation in any such investment.
Sometimes highly leveraged investments do work out — like when I purchased a group of hotel preferred stocks in 2009. That worked out great! But it also could have just as easily gone the other way! So be careful! It pays to do your homework when investing in heavily leveraged investments.
Once a traveling family arrives at their destination they still need to have some fun. State parks are perfect family-friendly attractions, but they’re generally not an investable asset.
Instead, publicly traded amusement parks could be one potential investing option — Six Flags (Symbol: SIX), Cedar Fair (Symbol: FUN), and Seaworld (Symbol: SEAS) are pure-play “attraction”-style investments you might consider.
As the economy begins to unlock this summer, most amusement parks are expected to quickly re-open, albeit at lower attendance levels.
Other potential beneficiaries of this “local travel” trend might be entertainment companies like Disney (Symbol: DIS) and Comcast (Symbol: CMCSA). Both of these companies operate huge theme parks (like Disney Land and Universal Studios). While definitely not a ‘pure-play’ investment, amusement park subsidiaries are a large and important part of both conglomerates.
Most public attractions (like amusement parks) will be required to operate at lower capacity this summer (to comply with state social distancing guidelines), but this is by no means a death sentence for amusement parks. Fewer visitors means fewer required employees, and less wear and tear on the park. Large capital expenditures and park refurbishment can also be postponed, and cash flow improved in the short-term.
Assuming these attractions will survive on reduced visitor numbers, longer-term profitability will eventually return to a more normalized level, potentially providing a nice “stock bounce” in a year (or two).
While the travel industry is definitely having one of it’s worst years ever recorded in modern history, there will still be a few survivors and even a few winners in the dumpster fire called travel. Yes, travel will almost certainly be different over the next year or two — molded by the twin forces of a pandemic and the worst recession in recent history.
With fewer dollars in pockets and a pandemic still raging, consumers are clearly not as interested in flying right now. Smaller “local” vacations seem to be gaining in popularity.
Yes, I’ll admit that travel is currently one of the worst performing sectors of the economy right now. But it won’t always be that way. Eventually the economy will improve, the pandemic will end, and consumers will have plenty of spending cash again. Travel will pick up again.
Any stock or travel business that finds a way to thrive in this environment is bound to do great when the economy finally improves. Now is a good time to sort through the rubble and pick up a few hidden gems!