As the Omicron strain of the coronavirus pandemic spreads at a seemingly unrelenting pace, some investors are growing increasingly concerned about travel and leisure stocks.
These concerns could eventually give way to opportunities with assets such as Albus International Foundation for Travel Beneficiaries (NYSEARCA: JRNY). The consumer cyclical segment, which includes many components of JRNY, is exiting a strong fourth quarter, prompting some concern that the segment is overvalued.
The group trades at an average premium of 3% for fair value estimates. However, valuations in the space are becoming more attractive, with 30% of stocks in the sector trading in the 4- or 5-star region (a marked improvement from 16% three months ago), says Morningstar analyst Erin Lash. “In this context, we believe travel and recreation is a time to invest, as we do not expect a rise in the number of cases to lead to a permanent reduction in consumers’ desire to travel.”
JRNY, which tracks the global travel index S-Network (TRAVEL), dedicates more than 46% of its list to consumer discretionary stocks. The second largest exposure to the sector is industries with 27.71%, mostly airlines.
In addition to the diverse lineup, one of the primary benefits of JRNY is what the exchange-traded fund, i.e. cruise operators, avoid. That’s not to say some of these companies will never show up in the box, but for now, it’s a bonus that they aren’t in JRNY because cruise operators have a documented history of being extremely sensitive to negative coronavirus news.
In addition, if different countries force these companies to dock again, they may be penalized with a no-revenue operating environment, and because some operators in this category are not included in the United States, they are not eligible for government assistance.
Of course, what’s inside JRNY matters more than what’s left out. One potential avenue for ETF strength this year is exposure to casino stocks, especially those with heavy Las Vegas footprints.
In a note to clients on Friday, Wells Fargo analyst Daniel Pulitzer spoke positively of Boyd Gaming (NYSE: BYD), Caesars Entertainment (NASDAQ: CZR) and MGM Resorts International (NYSE: MGM). Boyd has been called a “free cash flow machine” with MGM’s 2023 estimates being conservative. Pulitzer adds that Caesars has a free cash flow return of 11% and offers a 40% increase potential. This trio comprises about 3.3% of JRNY’s roster.
Other Travel & Leisure ETFs include VanEck Vectors Gaming ETF (BJK) and the American Global Gates Foundation (JETS).
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The opinions and expectations expressed herein are only those of Tom Lydon, and may not actually come true. The information on this website should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.