Bull vs. Bear is a weekly feature where the VettaFi writers’ room takes opposite sides for a debate on controversial stocks, strategies, or market ideas — with plenty of discussion of ETF ideas to play either angle. For this edition of Bull vs. Bear, Elle Caruso and James Comtois debate the investment case for travel stocks in the current market environment.
Elle Caruso, staff writer, VettaFi: Hey, James! After nearly three years of being cooped up, I’m so excited for my end-of-year trip to Bora Bora. I can already taste the beachside mai tais and ice-cold beer. This trip was certainly a splurge, but I would pay just about anything to get out of the hellscape that is New England this time of year. Where are you headed for the holidays?
James Comtois, staff writer, VettaFi: Hello, Elle! Hope you enjoy your time away (and the mai tais). Where am I going? Nowhere! I’m staying put and hunkering down this holiday season. While people do seem to be ready to travel again, maybe they shouldn’t. With the Federal Reserve continuing to raise interest rates and the effects only now being felt, travel spending could dry up as consumers face a possible recession (which many analysts and managers now believe is a certainty).
Now, I don’t want to rain on your travel plans. As a fellow New England native, I understand the desire to move to warmer climes in the winter, but I’m clearly a bit of a bear when it comes to investing in the travel sector.
Caruso: Well, while I see your point, I’m not the only one prioritizing travel and willing to make cuts elsewhere. I guess that makes me a bull. Thanksgiving weekend saw the highest foot traffic across U.S. airports since the pandemic began, per the U.S. Transportation Security Administration. That strong travel spending is expected to persist into 2023.
Delta Air Lines CEO Ed Bastian said in an interview with CNBC on December 14 that the industry has already seen its recession. Quoting Bastian: “Consumers are prioritizing their spend, where they’re making choices, and they’re prioritizing investing in themselves and experience.”
Delta, on December 14, also upgraded its earnings estimates for the current quarter, now expecting total revenue to come in 7-8% higher than the fourth quarter of 2019. Looking further ahead, the company even said it expects profits to nearly double next year.
Even with this uplifted forecast, shares of Delta are still down -41% from the beginning of 2020, so I think it’s a great time to add exposure to the rebounding travel industry. A strong offering is the U.S. Global Jets ETF (JETS), which weighs Delta over 10% while also providing exposure to other airlines.
Comtois: For sure, people are prioritizing travel, but while travel has increased, it doesn’t seem to be lifting travel stocks. The Dow Jones US Travel & Tourism Index is down 35% YTD as of December 14, while the S&P 500 Hotels, Resorts & Cruise Lines Index is down 22%.
Delta being down 41% from the beginning of 2020 is less a buying opportunity than a big red flag — it suggests that it’s still not rebounding from its pre-pandemic heights. It’s not just airlines; MGM Resorts, Wyndham Hotels & Resorts, and Airbnb have gone down 19%, 20%, and 46%, respectively, YTD as of December 14. So, if travel is on the rise, travel stocks apparently didn’t get the itinerary.
At the risk of bringing down your high spirits before your trip, there’s another dour point I’d like to make (sorry, it’s what bears do). In addition to the possibility of a global economic downturn, there’s a very good chance we’ll face a debt ceiling crisis next year (another reason to stay home and pull the blinds). If either (or both) things happen – and at least one of those events will likely occur – consumers will have to significantly cut (or downright eliminate) their travel budgets.
Caruso: While Delta’s 2023 guidance raise and outlook is a valuable insight into the industry, I would actually allocate to a broad sector diversified travel ETF instead of any individual travel stock or either of those indexes. An example is the ALPS Global Travel Beneficiaries ETF (JRNY), which is outperforming both of the indexes you cited, as well as broader markets. Year to date through December 15, JRNY is outperforming the S&P 500 by 23 basis points on a price change basis, but the gap is widening. In the past month, JRNY is outperforming by 136 basis points. The fund holds consumer staples, consumer discretionary, and industrials, as well as smaller positions in financial and information technology stocks that have stakes in global travel, which has led to JRNY posting two consecutive months of positive performance. I see this well-diversified fund as an ideal solution for gaining exposure to the rebounding industry while sidestepping some of the volatility by diversifying exposure.
The debt ceiling crisis is indubitably an important issue, but investors have thus far voiced a nonchalant view on the issue since the U.S. has gone through this before – not all that long ago – and Congress has always ultimately ended up voting to raise the debt ceiling. Plus, the debt ceiling issue potentially raises issues for the bond market, possibly affecting interest rates. Still, aside from short-term volatility, there should not be long-term effects for equities.
I also expect any volatility among travel stocks to potentially be offset by the rebounding international economy. There’s still a lot of pent-up demand as those economies start to come out of COVID. We may feel like we’re almost done with COVID in the U.S. and Europe, but other places aren’t there yet.
Comtois: I truly hope you’re right about the debt ceiling. While yes, Congress has always ultimately voted to raise it, this time feels… a bit different, but that’s a whole other discussion for another day. Maybe after the holidays when you come back from Bora Bora?
You brought up another major reason I’m staying in my cave and not investing in travel: COVID. Despite some claiming that the pandemic is over, it most certainly is not.
Speaking of the pandemic, even after the U.S. airlines received more than $50 billion in taxpayer-funded bailouts last year to stay in the skies during COVID, air travel is still a nightmare, with flight cancelations and delays soaring. It looks like this won’t change anytime soon. So, there’s more than just a little disappointment with how airlines handled the billions they received in bailouts earlier in the pandemic.
While Direxion has the Direxion Daily Travel & Vacation Bull 2X Shares (OOTO), it has yet to issue a bear counterpart fund. So, until that happens, might I suggest checking out the MicroSectors Travel -3x Inverse Leveraged ETN (NYSE Arca: FLYD), which was one of the top-performing leveraged and inverse ETFs for the week ending December 11?
Caruso: Well, it’s about time for me to head off to the airport. I hope I’m spared from the nightmare flying experience that so many travelers have faced recently, but regardless, I’m so excited to be boosted and able to travel again. Any headaches will be worth it.
That excitement to travel again explains why demand has continued to swell even as airline fares are up 36% year over year as of the end of November. Despite an economic slowdown, the International Air Transport Association has continued to uplift its forecasts, now expecting 2023 to be a profitable year with more than 4 billion airline passengers.
Based on the incredibly low valuations of travel stocks coupled with soaring passenger volumes and airline flight prices, I think now is a great time to add exposure to the travel industry. Particularly if it’s bundled in a well-diversified ETF, like JRNY or the Defiance Hotel Airline and Cruise ETF (CRUZ), which limits the weight of any individual security to 8%.
Comtois: I, too, hope you’re spared from a negative flying experience — and if you’re not, just remember that you’re still going to be landing in Bora Bora. Jeez, I really hope I haven’t dampened your spirits for your upcoming trip, Elle. Despite my bearishness on travel stocks, I truly hope you have a lovely trip while I hunker down and hibernate. Seriously, don’t let my dour outlook on travel stocks ruin your trip. Safe travels, and don’t forget to bring me back a snow globe or T-shirt!
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