Certain sectors are about to get a jolt of energy from the post-Covid recovery. Others aren’t. Here are 3 reopening stocks to avoid.
Millions of Americans are hopeful that 2021 will be the year the pandemic becomes a thing of the past. Excitement abounds over what many anticipate will be a full recovery of the economy, based partly on the increasing availability of vaccines.
Just one month into the new year, there are already signs of progress on the reopening front. A growing number of U.S. states are beginning to relax Covid-related restrictions and move toward normalcy as the nationwide coronavirus case rate count declines.
Among the most recent progress being made is California’s cancelling of stay-at-home orders. This means that restaurants, hair salons and gyms could soon re-commence outdoor services.
Michigan, meanwhile, will allow restaurants and bars to resume indoor dining on February 1. Stadiums are also being allowed to open to the public, albeit at limited capacity. And New Mexico’s governor said schools can reopen on February 8.
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In New York, home to some of the nation’s most stringent Covid-related measures, Governor Andrew Cuomo is considering lifting bans on certain activities in some areas of the state. (The much-anticipated reopening of New York’s indoor dining scene, however, isn’t likely to happen anytime soon).
By and large, though, the states are gradually taking steps toward a return to normal. The stock market has already discounted much of the anticipated economic recovery, with perhaps some additional upside to come in the next few months as lockdowns end and strictures are eased.
But the substantial gains seen last year in several segments of the consumer discretionary sector—including automobiles, food services and entertainment—will likely lose some of their tailwinds as the reopening proceeds (and which is already baked into stock prices to some extent).
While some stock market sectors look to remain strong even as the reopening gains traction (e.g. communication services and financials), other areas will lag. Foremost among the potential laggards are companies in industries that aren’t poised to see an immediate benefit from the early stages of the economic reopening. Let’s take a look at some of them.
3 Reopening Stocks to Avoid
One such area that looks set to continue struggling in the coming months is the airline industry. According to the International Civil Aviation Organization (ICAO), airline industry seating capacity last year fell nearly 50% worldwide. Just 1.8 billion passengers booked flights through 2020, compared with around 4.5 billion in 2019, according to the ICAO.
Furthermore, according to a United Nations News report the ICAO “does not expect any improvement until the second quarter of 2021, although this will still be subject to the effectiveness of pandemic management and vaccination roll-out across the world.”
Reopening Stocks to Avoid: American Airlines (AAL)
One of the most useful proxies for how forward-looking institutional investors are betting on an airline industry recovery is to watch the stocks of the leading U.S. airlines. American Airlines (AAL) is a case in point. Passenger traffic for the nation’s largest carrier by fleet size remains muted, although the company did report a slight sequential increase in passenger demand during the third quarter.
Revenue in Q3, however, declined by a substantial 73% compared to a year ago. This was attributed to passengers avoiding flying due to continued Covid concerns. [Note: The company’s fourth-quarter earnings for 2020 are due out on today, January 28.]
A major goal of American Airlines is to reduce its daily cash burn rate to zero as quickly as possible. The company’s burn rate improved by approximately $14 million per day in Q3, from $58 million to $44 million, and management expects the fourth-quarter burn rate to improve further, to between $25 and $30 million per day. That’s still too high for comfort, however.
Management’s efforts to conserve cash and bolster liquidity will likely pay off once the economy is fully reopened and customers feel confident enough to fly the friendly skies once again. But that could take a while. Indeed, some industry analysts believe that a full recovery for the airlines could be anywhere from three to five years away.
But for now, American’s chart tells the story of sluggish demand which will likely continue into the foreseeable future. What would change this outlook? A decisive new breakout above the upper boundary of its 10-month trading range at the 20 level would suggest the market sees the proverbial “light at the end of the tunnel” and is beginning to discount a return to normalcy for the company. Until then, however, conservative investors should probably avoid the stock.
Reopening Stocks to Avoid: Carnival Corp. (CCL)
Another industry particularly hard hit by the pandemic is cruise lines. Carnival Corp. (CCL) is the industry leader but continues to face stiff headwinds from pandemic-related restrictions. As analyst Josh Arnold has pointed out, “Cruise lines are the most vulnerable because the business model is to pack thousands of people into a floating box and keep them there for days at a time.”
Carnival is still struggling with the effects of shutdowns and social distancing. Its fourth-quarter cash burn rate was $500 million per month—below the previous quarter’s $770 million per month, but not exactly a ringing endorsement for investors interested in plunging in and buying the stock. Meanwhile, Carnival’s Q4 revenue of $34 million missed the consensus expectation by a whopping $329 million, while the per-share loss of $2.06 missed by 11 cents.
Not all the news was bad, though. Cumulative advance bookings for the second half of 2021 are within the historical range, according to Carnival. And the company’s advance bookings for first-half 2022 are actually ahead of a “very strong” 2019 (which was at the high end of the historical range). Further, management said the company has enough cash ($9.5 billion) and liquidity to sustain itself through 2021 even in a zero-revenue environment.
But the chart tells the same languid tale of diminished demand, as virus-related problems are likely to remain a factor for the cruise line going forward. On January 25, for instance, the company announced additional delays returning some ships to service, while also cancelling some cruises (sending the stock price lower). A decisive breakout above the 25 level, however, would suggest the company’s intermediate-term turnaround efforts are gaining traction. But until then, investors should look elsewhere.
Reopening Stocks to Avoid: Hyatt Hotels (H)
One industry that’s seeing a fair share of reopening optimism in the new year is lodging. Hotels were among last year’s biggest losers, but with the overall economic picture brightening, many observers feel confident that hotels will make a huge comeback in 2021. And while higher occupancy rates are widely expected by analysts this year compared to 2020, obstacles remain on the path to a full recovery.
Hyatt Hotels (H) experienced huge revenue losses last year due to pandemic-related shutdowns and travel restrictions. Subsequently, the company was forced to suspend dividend payments in order to conserve cash.
What’s more, last year’s disastrous events led to Hyatt taking on massive levels of debt (currently around $3 billion), which will require a substantial boost in the top line to service. Fortunately for Hyatt, the consensus expects revenues to increase in each of the next three quarters (though at a tepid pace).
But for a long-term recovery case to be made for Hyatt, a return of big-spending business customers is likely needed. The question that many are asking, though, is: “With the work-from-home paradigm likely here to stay, will business travel ever reach pre-pandemic levels again?” It doesn’t take much imagination to see that, even after a return to normal, traditional business travel isn’t likely to recover to pre-2020 levels anytime soon.
Hyatt is making efforts to counteract this likely decline in business guests by introducing its Work from Hyatt program, which permits customers the use of a private guest room from 7 a.m. to 7 p.m. with Wi-Fi, dining and parking discounts, plus other hotel perks. Management hopes this new offering will pick up some of the slack from lost overnight stay revenue. That remains to be seen, but given the listless action of Hyatt’s stock price in recent months, the market is obviously still skeptical. Avoid for now.
Those are a few stocks to avoid. If you want the best-performing growth stocks right now, I highly recommend subscribing to our Cabot Top Ten Trader advisory, where every week Chief Analyst Mike Cintolo provides you with 10 of the market’s strongest growth stocks from both a technical and a fundamental perspective.
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