As the world stutteringly reopens after the Covid-19 pandemic, some leisure stocks are worth considering. Just don’t get burned.
As the northern hemisphere prepares for summer after a winter of discontent, one would be forgiven for dreaming about the beach. In South Africa, beach season never really ends given how pleasant the weather is relative to northern climes.
However, the BEACH that we are looking to explore is not one of crystal blue waters and white sand. Insofar as acronyms go, we have BRICS, FAANGS, but not many are familiar with BEACH stocks.
BEACH stocks refer to shares in the following sectors: Bookings, Entertainment, Airlines, Casinos and cruises, and Hotels. Given the multiple waves of the Covid-19 pandemic breaking upon the BEACH, it was not surprising that March last year saw many stocks in this sector halve in value or worse. Many companies in these sectors saw profits and balance sheets decimated.
The rebound was equally violent. Many of these stocks have surged amid a generalised market rally and are now trading at close to record highs.
Not all beaches have the same appeal, and we don’t want to get stuck in the seaweed while searching for seashells. So, the question begs, which of the BEACH stocks still present a compelling long-term story?
Bookings companies like Booking Holdings (Booking.com) and Expedia have been hard hit. In a recovery after the pandemic, it is likely that service providers, like hotel groups, may opt to cut out the middleman and offer more attractive discounts directly. With little protective moat, this would be like walking bare foot on a coral beach.
Entertainment stocks focused on theme parks, live events and gaming all elicit a sense of childhood wonder, kind of like getting the sand stuck between your toes on a beach holiday. Disney and Penn Gaming are good examples of stocks which may create happy beach memories for years to come.
At a $300bn market cap, Disney is the blue flag of beaches. Its recent saving grace has been its streaming service as investors appreciate the “portfolio effect” of the House of Mouse. The stock is up over 20% from levels before the pandemic and over 100% off the lows and the parks are not even opened yet. I believe that the brand value and “cross-sell” nature make it a superb play with upside potential once parks are back in operation.
Another exciting play in this space has been Penn National Gaming. The $14bn company took the opportunity of the pandemic to diversify from its live sport betting properties and racetracks to acquire Barstool Sports. It has turned its focus to dominating the online sports betting space. At almost 10 times its pandemic lows, it may look a little rich in the short term. However, the long-term growth prospects as well as a solid return on equity of 14% and great growth runway, remind me of watching the kite surfers off the beaches in Cape Town.
Airlines are a dismal business.
Most US carriers are still 25% below their pre-pandemic levels while global player, International Airlines Group (the owner of British Airways and others) is still about 50% lower. My approach here would be to focus on regions where vaccination levels are highest and where travel restrictions are being eased more aggressively. This favours US carriers over international plays. This is like a fishing beach where you cast your line and maybe there is a whopper or maybe you just spend a lot of time there with nothing on the line.
Cruises are like packed Durban beaches on the holidays. You may want to avoid it for now, but when the time is right (maybe in the distant future), it could become attractive again. The risks of confined spaces in the context of a pandemic will severely impact demand. Also, the cost to enable adequate social distancing in what is a confined space on the seas, will be considerable.
Casinos may be opened in the US this week. Bear in mind though, that a lot of casino revenue comes from conventions and shows, a segment which may see pressure for some time.
Hotels represent the “bricks and mortar” component of the BEACH. Most large chains are flat compared to pre-pandemic levels. Once travel resumes, either for business or leisure, hotels are primed for a comeback. With a real estate underpin, it may well serve a “through the cycle” investor but disruptors like AirBnB (which only listed in December 2020) may still cause some sunburn.
Mobility data shows that “leisure” remains around 9% below baseline in the US (13% below baseline in SA). The world is building back from the pandemic. The pace of vaccinations and recovery will result in relative winners and losers. It will be important to pay attention to the nuance and maybe the BEACH may prove attractive but remember your sunscreen.