Last month, when news of the Omicron variant broke, global stock markets plunged. Described as potentially the worst variant identified so far, concerns rose of renewed pandemic restrictions. On Friday 26 November, the FTSE 100 suffered its biggest one-day fall since June last year as a result of the news. Travel stocks were some of the worst hit.
Boris Johnson announced the UK would move into ‘Plan B’ of restrictions two days ago. With this in mind, I want to explore some travel stocks for my portfolio. Some could be cheap opportunities for the long term or picks to avoid until the pandemic eases.
It is worth noting, travel and travel-related stocks can range from aviation such as airlines to hotel businesses and transport stocks. I have taken a closer look at some options I am considering for my portfolio. Should I buy or avoid these shares?
Pick #1
British Airways owner IAG (LSE:IAG) is one of the largest airlines in the world. Under regular market conditions, it flew 55m customers to over 200 destinations. It has been one of the worst hit travel stocks since the pandemic began. News of the Omicron variant will be a major blow to its recovery.
As I write, IAG shares are trading for 138p, which is 14% less compared than its 162p share price at this time last year. Since the news of the new variant broke at the end of last month, the shares are down nearly 10%.
The bull case for IAG is that at current levels, it looks cheap. It currently sports a price-to-sales (P/S) ratio of close to 1.7. The general consensus is that a lower P/S ratio indicates a stock may be undervalued. Furthermore, as one of the largest aviation firms in the world, it could benefit from its vast reach and extensive operations if the travel and tourism sector picks up once more. In addition to this, pre-pandemic performance was good. Revenue grew year-on-year for three years prior to the pandemic. I understand the past is not a guarantee of the future, however.
The threat of new variants and Covid-19 becoming something we must live with is a credible threat. One must consider that the new normal is peaks and troughs of travel and regular downturns. This would seriously affect IAG’s performance, any returns, and investor sentiment.
From the picks I have considered, IAG is one I would consider adding to my holdings with a view that in the longer term it could return to former glories.
Pick #2
InterContinental Hotel Group (LSE:IHG), known as just IHG, is one of the world’s leading hotel companies. Some of its best known brands include InterContinental, Holiday Inn, and Crowne Plaza.
IHG is different to IAG in the sense that hotels are still used domestically and aren’t always reliant on holiday goers and their bookings. In certain locations and for certain brands, however, its hotels cater to holiday goers. Hotel bookings could rise due to corporate use, and people domestically are looking to book domestic vacations, without the need to fly. With this in mind, IAG could be a pandemic recovery play in the long term in my opinion.
As I write, IHG shares are trading for 4,665p, which is 2% less than at this time less than last year when shares were trading for 4,778p.
As the pandemic recovery continues, IHG could see demand for its hotels increase. It is in a unique position in that it possesses excellent brand power throughout its range of budget and premium hotels. Pre-pandemic performance was impressive. IHG posted revenues of over £4bn for a few years in a row.
I wouldn’t add IHG shares to my holdings currently, however. Forecasted revenue is much lower than pre-pandemic. I understand these are forecasts and could change, but with the current pandemic-related issues, I am paying attention to them.
At current levels IHG is quite expensive too. Furthermore, macroeconomic pressures such as rising inflation and costs could affect bookings and performance if passed on to the customer. I also saw that Fundsmith Equity manager Terry Smith, often dubbed Britain’s Warren Buffett, sold his IHG shares in October. When successful fund managers make moves, I tend to pay attention.
Pick #3
Wizz Air (LSE:WIZZ) is a budget airline that focuses on central and eastern Europe. To date, it has flown over 200m customers to its multiple destinations. The rise of budget airlines has been remarkable in recent years but there is lots of competition in this market too.
As I write, shares in Wizz are trading for 4,340p which is 5% less than at this time last year when shares were trading for 4,576p.
Positive news for Wizz Air recently has made me pay attention. In early November, it reported a rise of 160% in passenger numbers compared to the same month last year. It followed that up later in the same week to report its first profit since 2019! A €57m operating profit in Q2 signified progress. It is worth noting the overall six months was loss-making, however. Customer numbers compared to 2020 are up substantially compared to 2020 levels which is to be expected with the vaccine rollout and continued reopening.
From a bullish perspective, Wizz shares have surpassed pre-crash levels and rising customer numbers are positive. It also has a robust balance sheet and compared to some others in its market, it has a low-cost base. Other airlines have scrambled to cut costs and attempt to reduce cash outflow during the pandemic period. Wizz has had a better level of financial flexibility due to its healthy balance sheet, which is currently cash rich. As economic reopening continued, Wizz Air’s management made ambitious plans to expand and continue growth plans. This has been signified by an order of new planes it plans to employ for the new routes it is planning.
The threat of rising inflation, rising costs, and new variants and emerging restrictions will affect Wizz Air and its future prospects, like most travel stocks. Furthermore, volatile fuel prices could have an impact on profit margins. Fuel is very expensive right now. I think Wizz Air could be a good recovery play for my portfolio based on its recent news and healthy balance sheet. It is confident of recovering and already planning expansion despite current macroeconomic woes. I would add shares to my holdings for the long term.
