Thanks to Covid-19, travel in the U.S. is at historic lows. But in China, it’s picking back up already. Here are two Chinese travel stocks to take advantage.
U.S. equity markets have rallied on recent news of effective Covid vaccines as investors, generally, seem to be looking ahead of the pandemic. And while the markets enjoy the luxury of looking six (or so) months ahead, we’re stuck in the reality of what’s likely to be a harsh winter. Your Thanksgiving probably looks much different than it did last year, with smaller gatherings, less travel, or even virtual celebrations. We’re all making do as best we can and, unfortunately, Christmas will probably look very similar.
Traveling is one of those luxuries that we’re all eagerly anticipating, and that sector also happens to have been hit particularly hard by this pandemic.
There’s value to be found in a number of travel companies, even in those segments (like cruise lines) which face a greater degree of uncertainty than the broader sector and have been forced to take on additional debt or dilute their share value through additional equity offerings. But as an alternative to making an educated guess about which cruise line is the least hampered, let’s take a look at travel stocks that may be better positioned to actually thrive.
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The Return of Chinese Travel Stocks
The U.S. is, inarguably, in the midst of a third wave that is unlikely to abate until a vaccine is available nationwide or much more stringent measures are taken. Both of those prospects seem likely to hinder the recovery of domestic travel.
On the other side of the Pacific, however, things are starting to look much rosier. The Chinese government’s ability to implement and enforce draconian lockdowns has given them a significant leg up when it comes to slowing the spread of Covid-19. Whether or not we can accept the Covid statistics at face value, Chinese consumer sentiment is significantly improved. While travel (especially air travel) still faces headwinds, that sector is probably better positioned overseas than it is domestically.
So here are two Chinese travel stocks to consider for the Covid-19 recovery, and their U.S. equivalents for our (probably later) recovery.
2 Chinese Travel Stocks and their U.S. Equivalents
Trip.com Group (TCOM), China’s largest online travel agency, experienced a surge in search traffic several weeks ago with the announcement of a Singapore-Hong Kong quarantine-free travel bubble. That travel bubble was recently postponed due to a Covid surge in Hong Kong, but the search spike reflects the same pent-up travel demand that we’re experiencing domestically.
TCOM has largely recovered from the pandemic-induced sell-off in March and is trading near its prior highs, but the company has a strong track record of earnings growth and is well positioned to benefit from a return of consumer spending, which has been lagging as China’s V-shaped recovery has been largely driven by manufacturing.
U.S. equivalent: Expedia Group (EXPE), like Trip.com, owns a variety of subsidiary travel search and booking companies which collectively capture a majority of market share. Also like Trip.com, Expedia’s share price is trading near 52-week highs as the market prices in a return to normalcy. Absent additional government-mandated lockdowns, however, Trip.com is in a better position to navigate the next six to 12 months as we await widespread vaccine availability.
Melco Resorts & Entertainment (MLCO), which develops and operates integrated resort casinos, has suffered from significantly depressed earnings for the last three quarters, which should come as no surprise given the more restrictive lockdowns in Europe and Asia. Notably, however, Melco has recently resumed construction on City of Dreams Mediterranean, which promises to be a one-of-a-kind gambling destination in Cyprus. While the project was delayed slightly, Melco still anticipates opening in 2021.
That project, coupled with a resumption in gaming in Macau (which has thus far lagged gaming demand recovery in the U.S. despite staggeringly different pandemic conditions), should find Melco well positioned to take advantage of consumer demand. While ongoing travel reticence may prevent Melco from capitalizing on the Chinese New Year early in 2021, the emergence of a vaccine and creative travel measures should drive a full recovery not long after.
U.S. equivalent: MGM Resorts (MGM), which also took a significant earnings hit due to the pandemic, has actually seen revenues recover to roughly 40% of pre-pandemic levels. This is likely attributable to the United States’ overall resistance to lockdown measures and divergent attitudes between U.S. and Chinese consumers.
Former MGM CEO Jim Murren doesn’t expect a “robust recovery” until 2022, but expects Las Vegas to lead the way when live entertainment returns in full force.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More