A major airliner made the list
Subscribers to Chart of the Week received this commentary on Sunday, June 4.
‘Revenge travel’ has been a summer trend since the start of the pandemic in 2020. Eternal optimists that fell on black days looked to the light at the end of the tunnel, planning globetrotting adventures for when society opened back up. While life has been back to normal for a while now, pricey vacations and logistics are made months and even years in advance, so demand will likely remain elevated for the next few years.
Should investors then be pushing money into travel stocks this summer, to take advantage of the vacationing consumer? Scour the internet right now and there are plenty of headlines that read: ‘The Stocks You Need to Own as Consumers Still Travel This Summer,’ or ‘Prepare for an Expensive Summer Travel Season. These Stocks Should Benefit.’ However, like always, it pays to be a little contrarian when reading such headlines, and more research indicates a more nuanced sector landscape.
Below, Schaeffer’s Senior Quantitative Analyst Rocky White compiled the 25 worst-performing stocks in June on the S&P 500 Index (SPX) in the last 10 years. Per the yellow highlights, nine of those 25 fall under the ‘travel & leisure’ sector. Note Royal Caribbean Cruises’ (RCL) average return of -6.8%, with only two positive months in the last decade, as the worst performer on the list.
United Airlines (UAL) earlier this week enjoyed a halo lift when sector peer American Airlines (AAL) hiked its second-quarter profit outlook. Yet UAL has averaged a 2.8% loss in June, with only 30% of the returns positive in the last 10 years. It’s not just the high seas or blue skies; hotel stock Marriott International (MAR) averages a 3.4% loss in June, with a slim 30% win rate.
Did the damage from the pandemic in June of 2020 and 2021 skewer these results? June returns the last three years from RCL, UAL, and MAR are below, and they’re not pretty. It’s another reminder of the cascading impact of Covid-19; the virus itself may be behind us in the U.S., but the economic ramifications are still boiling underneath the surface for many companies.
There could be other explanations for the odd sector rotation. As Senior Equity Analyst Joe Hargett pointed out, travel bookings tend to occur six months to a year in advance. So for a cruise booked in January for June, the revenue shows up on the books for the first quarter, not the second. The same logic applies for airlines, hotels, and travel companies. Factor in the very real ‘buy in May and go away’ seasonal headwinds, and there is a lot working against these stocks to start the summer.
It’s an older reference point, but Senior Market Strategist Chris Prybal also pulled an article in Investors Chronicle from 2013. Per the table below, it showed the travel and leisure sector with a sharp loss in the summer months going back to 1987. Perhaps these headwinds are not strictly wrought from the pandemic, as it appears this sector has been one of the more seasonal sectors tracked for some time now.
But this doesn’t mean travel and leisure stocks should be tossed to the curb. June is just one month of the summer, and in MAR’s case, the stock is already brushing up against a historically bullish trendline. Per data from White, encounters with Marriott stock’s 160-day moving average typically yields a 10.3% 21-day return on average, with all seven of the pullbacks in the last decade finishing in positive territory. Given the rampant volatility experienced in the last three years, you can bet on MAR not being the only stock to fight seasonal headwinds with historically bullish trendlines this summer.
Should other travel stocks get dinged in June again, it could create intriguing entry points to then take advantage of the cyclical nature of consumer demand around the holidays. Smart travelers will start looking at their holiday travel plans in a few months. If another travel sector rotation occurs, there could be a wide range of stocks on the scrap heap that can be had for a discount.
Image and article originally from www.schaeffersresearch.com. Read the original article here.