Things are still very uncertain in the markets, with COVID-19 still being extremely disruptive in most of our society and the society at large throughout the world. I am hoping that you did not panic and sell in the last few weeks as that would have locked in your losses and could have been a disaster for your portfolio. After all, last week, we saw a decent comeback in the overall markets. But is that the beginning of the markets getting better? That I am not so sure of as the future and how long the COVID-19 social distancing needs to last in order to protect us the best we can against this unseen killer. But that does not mean that without some homework on your part that buying opportunities do not exist. Here we will look at the travel industry and some opportunities that may be present. If you are confused, do not worry, reach out to a Registered Financial Consultant for assistance.
Airlines
First, there are the airlines, and as we all know, they have been hit particularly hard by the pandemic. International flights are all but shut down for our three leading domestic carriers. Many domestic flights have been canceled as well, and they appear to be operating on a limited schedule as compared to the pre-pandemic era. Will all three of the leading airlines make a comeback? That is for you to decide if you wish to look at which you may want to purchase at these lower prices. But price and the airline’s reputation are not enough for you to decide if an airline is a buy. P/E are all attractive right now and is you are a value investor, and it appears to be a ripe opportunity to buy potential future earnings. But is a low P/E enough to purchase on? No, you are going to have to look deeper and see what the latest income statement and cash flow looked like before the pandemic. And then, you will need to examine the company’s balance sheet to see what their cash position was before the pandemic and what their debt is despite the pandemic. After you have looked at these items, you will have a better idea if the company is a buy or not. Depending on how long this last will determine if the company was healthy enough to survive and bounce back once we get to our new normal.
So what airlines are we looking at in the domestic market? They are American Airlines, Delta Airlines, and Southwest Airlines. These are the three leading US-based carriers that all have taken a beating in the previous month, and despite the comeback last week for them, the pain may not be over just yet as social distancing looks like it may be extended at least on the state levels if not the federal. But looking at American Airlines (AAL), they have gone from $30.47 on February 12, 2020, to a low of $9.39 on April 3, 2020, and stopping at 12.51 on Thursday, April 9, 2020. Delta Airlines (DAL) has a similar pattern in its per-share price going from $59.47 on February 12, 2020, to a low of $21.35 March 20, 2020, ending at $24.39 Thursday, April 9, 2020. And then there is Southwest Airlines (LUV), which may have fared the best amount the big three domestic carriers. On February 12, 2020, it was at $58.48, dropping to a low of $30.54 on April 3, 2020, ending at $36.47 on Thursday, April 9, 2020.
Based on nothing other than how the price of the stock reacted to the pandemic, it looks like Southwest Airlines did the best as far as their price went as they did not see such a dramatic drop as the other two. And when you look at the P/E for these three Delta and American have P/E in the 3 range while Southwest is around 8 meaning it did not see as much loss in per-share price as the other two possible did. When it comes to debt/equity American has a heavy debt load that is negative. At the same time, Delta is slightly positive, and again Southwest has a favorable debt to equity similar to Delta’s. Does that mean American is not a company worth buying? Not at all depending on what you see when you do your more thorough review than what I have provided here. Do your homework, and you may find some real deals in the airline industry at this time.
Hotels
Here we will not look at the three hotel chains I selected as much as we did the airlines, but the premise is the same. All are selling at a discount to where they were in mid-February. But like the airlines, the hotel industry is taking a hit due to social distancing as well. Not as many people require a hotel room and thereby the industry as a whole will suffer as long as we are in this environment. Choice hotels were trading at $108.23 on February 19, 2020, dropping to $53.57 on March 23, 2020, and end at $72.40 Thursday, April 9, 2020, and is currently trading at P/E of 18.19. Choice took a significant hit but has so far bounced back reasonably well. With Hilton, they were at a high of $113.92 on January 17, 2020, dropping to a low of $55.94 April 3, 2020, and rebounding to $68.45 on Thursday, April 9, 2020, with a P/E of 22.52. And Marriott was trading at $150.78 on February 12, 2020, dropping to $59.08 April 3, 2020, and ending at $81.31 Thursday, April 9, 2020, with a P/E of 21.45.
Conclusion
While the P/E ratios for the hotels appear to not present the same opportunity for value investors as the airlines, the debt to equity levels are also higher for the hotels on an average basis as well. The issue with both of these industries is they both have massive debt load, and right now, they have limited income flowing into the businesses. How they will react is anyone’s guess. Still, after looking at the three main financials, Balance Sheet, Income Statement and Cash Flow, you will have a better idea of what you may want to consider to purchase, And do not limit yourself to these two industries as rental car companies and restaurants have also taken big hits as well and could present buying opportunities as well.
These and other areas all deserve a look, not as prices are much lower than they were six weeks ago. Will all of the companies that have taken such massive hits to their per-share price bounce back? Time will only tell if that will be the case. But by doing your homework and examining the financials of a company, you have some tremendous buying opportunities that have not been seen since 2009. Do not sit on the sidelines and hesitate to buy good companies that are currently on sale.
If you think you need assistance to reach out to a Registered Financial Consultant for assistance and start a value position in some blue-chip companies today. To join our email newsletter, please fill out the form below.
