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The coronavirus has battered travel stocks but I’d back these growth stars to recover

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Couple relaxing on a beach in front of a sunset
Image source: Getty Images.

The cruise industry is sinking like a stone and many airlines are at risk of being forever grounded if no solution to their financial woes is found. No wonder investors are avoiding travel-related stocks like the plague.

Dire as the situation may be however, I do think there is the potential for some to recover once the coronavirus storm has passed.

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On sale?

Considering its staid-looking high street stores, I’ve long thought the valuation attached to WH Smith (LSE: SMWH) to be frothy. Having now fallen a little over 60% from the all-time highs achieved back in January, this may no longer be the case. 

This is, after all, a company that’s seen its travel concessions business become very lucrative over the last few years. Further evidence of this came in January. The FTSE 250 member reported a 19% rise in revenue. This included contributions from recent US acquisitions InMotion and Marshall Retail Group.

Of course, the next few months are likely to prove very tricky. For as long as travel is restricted and high streets are deserted, WH Smith won’t make any money. Units operating in hospitals are an exception though.

Nevertheless, I’m a big fan of businesses that serve a captive audience and the company now operates 1,200 travel stores in 32 countries. There’s also a lot to be said for the fact that WH Smith generates superb returns on the money it invests when it is functioning at full steam. Margins aren’t massive but they’re still better than a lot of other retailers out there. The debt it carries isn’t excessive either.

I’m not sure I’d be pulling the trigger and buying a few shares just yet. But I’m definitely sensing an opportunity

Debt-free

Stockport-based holiday firm On the Beach (LSE: OTB) is another company that could rise from the ashes of the coronavirus-induced market crash. Like WH Smith, a lot of this depends on how quickly the virus is tackled and the lockdown lifted. 

For On the Beach, it also depends greatly on how the UK general public respond once the full financial impact of the crisis is known. The possibility of a prolonged recession will surely mean that discretionary purchases like a stay in the sun will be the first to go.

Seen from this perspective, On the Beach could certainly suffer more than the newsagent. The latter will benefit merely from commuters returning to the office after the enforced break. That said, there are still reasons to be optimistic.

For one, there’s no debt on its balance sheet. This is not to say that even previously financially sound businesses won’t go to the wall in 2020. It should provide investors with some hope going forward though.

Second, On the Beach has an asset-light business model. This means it’s not burdened by massive fixed costs like other businesses in the sector. Marketing spend can be (and has been) cut quickly. For me, this makes it a safer bet than, say, TUI, which operates a portfolio of hotels, cruise lines and airlines.

On the Beach’s share price is now back to levels not seen since 2016. Does this make it a ‘bargain’? I still think it might be too early to say. But it’s worth keeping an eye on, I feel. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended On The Beach and WH Smith. 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.

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