If any one sector has been hit hard by the pandemic, it is travel. Specifically, leisure travel. Companies in the segment have seen their financials and their valuations affected. Even though gradual reopening and rapid vaccinations have put them on the path to recovery, they remain vulnerable for now. As a result, leisure travel stocks are still available at deep discounts, making them among the cheapest UK shares around.
Consider German travel company TUI (LSE: TUI), for instance. Its share price may have come a long way since last year. But it is still around half of what it was before the pandemic started. A similar picture is evident for cruise operator, Carnival (LSE: CCL).
Is the worst over for travel stocks?
I do believe, however, that there is a good chance that the worst might be over for these stocks. While there are fresh concerns about the spread of coronavirus variants, we are now armed with vaccines. This means that we are better at fending off any new virus attacks in a way that was not possible last year at this time. To me, this suggests that even if progress stalls in the future, it may not do so for too long.
There is also a return of confidence in travel. TUI, for instance, reported a 1.5m increase in bookings from May to earlier in August. Its total bookings for this summer reached about half the levels seen in an average year. The number may have been even higher if the UK’s reopening were not delayed by a month. Carnival too, reported positive news. It expects to bring back 65% of its total cruise capacity by the end of this year.
If consumer spending remains strong, then we can expect travel demand to stay buoyant as well. There may be some softening after the summer, but that is a seasonal trend. The wider trend seems positive. After all, British households clocked record savings as a proportion of their incomes last year as the lockdowns gave us limited opportunities to spend. The UK economy has also made a strong comeback. And the euro area is also growing nicely.
What comes next for these cheap UK shares?
I think the next few months will reveal more of what to expect for travel stocks in the year ahead. The results of the summer months will help in making an assessment of how their financials may look from now on. The start of the winter months could help me understand the extent to which coronavirus is likely to still stunt economic activity. And these developments will also help me to make a macro assessment of how entrenched the economic recovery really is, or not.
Would I buy them now?
As tempted as I am to buy stocks like TUI and Carnival while they are still down, I think there is still some risk to buying them, however. At this point, I am more likely to buy ‘safer’ reopening stocks. But these cheap UK shares are my buy list, if my risk appetite increases.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.