5 Travel Stocks to Buy in a Tricky Environment

Southwest Airlines

• Market value: $28.9 billion
• Industry: Airlines

It might seem odd to recommend Southwest Airlines (LUV, $48.86) considering the firm just recently slashed its third-quarter guidance as fading booking trends were hinting at a more difficult late summer and early fall.

Still, there's a lot to love about LUV.

Southwest has historically been one of the best-run airlines thanks to its forward-thinking management. Indeed, LUV has used the pandemic to strengthen its position. Back in June, Southwest expanded its operations to include two new cities as well as 78 new and returning routes. It also is expanding its fleet, announcing in June that it increased an outstanding order to Boeing (BA) by roughly three dozen more 737 Max 7 aircraft.

But it's also already pivoting in anticipation of continued Delta-variant difficulties. Southwest said in late August that it would pull back on its schedule – by 27 flights daily between Sept. 7 and Oct. 6, and 162 flights daily between Oct. 7 and Nov. 5 – to account for the possibility of reduced travel thanks to the Delta variant, and to avoid many of the operational issues it struggled with this summer.

Also bullish is Southwest's positioning among low-cost carriers. "With what's likely an uneven recovery ahead, we continue to prefer the low-cost operating model, as their networks naturally align with the recovery in leisure and VFR (visiting friends and relatives) travel, while low direct and indirect flight costs provide some protection for margins," says Susquehanna Financial Group analyst Christopher Stathoulopoulos, who rates the stock at Positive (equivalent of Buy).

Southwest's financials also inspire confidence. As of the end of June, LUV had nearly $18 billion in available liquidity, versus debt of $11.4 billion. Meanwhile, the airline brought its "core" cash burn to just $1 million daily on average during Q2, and even managed positive core cash flow of $4 million daily on average in June. In other words, Southwest can likely survive another period of weakness better than many peers, and is positioned to profit handily once travel does return to something resembling normalcy.

This combination of solid financial footing and quick-acting management makes Southwest one of the best travel stocks you can buy.

Marriott International

• Market value: $43.3 billion
• Industry: Hotels

The pandemic was not kind to hotel chain Marriott International (MAR, $133.00). In 2020, the hotel group – whose brands include its namesake, Ritz-Carlton, St. Regis, Westin and W, among others – suffered its first annual loss since the depths of the Great Recession. At the height of the pandemic, in the second quarter of 2020, Marriott was forced to fully close more than a quarter of its hotels, and revenue per available room (RevPAR) was off 90% year-over-year.

What a difference a year makes.

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During Q2 2021, Marriott's RevPAR rebounded by 262.6% across its roughly 7,800 global locations. The firm also managed to produce a profit of $422 million versus a $234 million loss in the year-ago quarter.

The secret to Marriott's sauce comes down to a concept called "Bleisure."

The rise in working from home and the capabilities of cloud computing have allowed a growing number of people to combine leisure travel with business trips. Consumers will either bring family and friends with them on business trips, or they'll extend a business trip to take vacation time. That's great for Marriott, whose portfolio of brands skews toward upper-limited and full-scale hotel brands that best cater to bleisure travelers.

And Marriott is actively courting this crowd. The hotel recently launched its Work Anywhere program, which includes options such as using a hotel room/guest facilities for just one day without staying in the room overnight. Think of it as a WeWork-esque arrangement.

Marriott's shares aren't cheap, but they're not wildly expensive, either, at less than 26 times next year's earnings estimates. Given the potential for both bleisure travel and a more vigorous eventual uptick in travel more broadly once the U.S. gets over the COVID hump, MAR might be worth the price.

Choice Hotels International

• Market value: $6.6 billion
• Industry: Hotels

Choice Hotels International (CHH, $118.85) is another hotel chain, but that's where its similarities with Marriott end. Its collection of brands – which includes Clarion, Comfort Inn, Econo Lodge, Sleep Inn and Quality Inn – is quite different from Marriott's more luxurious roster.

Still, Choice feeds into another travel trend: the rise of "drive-to-leisure" destinations.

Anyone with kids will tell you that spending the entire year trapped with their little ones during quarantine wasn't easy. The urge to get out of the house was present and constant. While some families were able to scratch the "big travel" itch during early summer, the rise of the Delta variant and a return to school is putting a lid on family travel yet again.

But you could always drive a few hours to that water park or museum and turn it into a quick weekend trip.

That's where the Choice portfolio excels. The firm's nearly 7,100 hotels are firmly in the midscale when it comes to hotel chains, and they're usually located right off of major highways or in suburban areas. They're designed for quick trips.

More interesting to investors is Choice's business model. You see, rather than own and operate hotels, Choice uses a franchise model and collects royalty fees from owners, as well as a percentage of room revenues. This put CHH on better footing during the pandemic, as it wasn't directly responsible for rents or operational costs. At the same time, though, it stands to gain from increased travel without the same risks of traditional operators.

Even with the Delta strain starting to cut into travel, analysts still project Choice's revenues to rebound by 37% this year, to $1.07 billion, driving a 75% recovery in profits to $3.89 per share. They also see profits jumping another 20% in 2022, to $4.67 per share.

Choice's particular blend of offerings and business model might make it one of the best travel stocks to own as COVID continues to complicate the space.

Booking Holdings

• Market value: $94.6 billion
• Industry: Travel services

The growth of the internet over the last few decades has disrupted countless businesses. Among them? Your local travel agency.

One of the predominant reasons for that is the rise of Booking Holdings (BKNG, $2,304.45), which operates in 200 countries under brands such as Booking.com, Priceline, Kayak, OpenTable and Agoda. These sites make it easy for consumers to book their own hotels, their own car rentals, their own restaurant reservations, and their own experiences – often at discounted rates. Increasingly, it's focusing on the "connected trip," where you book all of the above in the same go-around.

As with a large number of internet businesses, Booking Holdings enjoys fat margins. According to S&P Global Market Intelligence, BKNG enjoyed profit margins of 15.3% during pandemic-plagued 2020 – and 38.6%, 39.7% and 38.7% in the three years prior.

Hedge Fund RiverPark sums up Booking's appeal, saying it utilizes a "high margin business model that requires limited capital expenditures, typically less than 3% of revenue, producing $4.5 billion free cash flow for 2019."

BKNG shares likely will ebb and flow as travel demand does, meaning the Delta variant could slow it down in the short-term. But Booking does appear to be one of the most attractive values among travel stocks. While its forward P/E is a little elevated, at 26, things look better once you factor in expectations for explosive growth. The company's five-year price/earnings-to-growth (PEG) ratio – which looks at valuation and factors in expected growth over the next half-decade – is a mere 0.25. (Any PEG under 1 signals that the stock is undervalued.)

Royal Caribbean

• Market value: $20.2 billion
• Industry: Cruise lines

Cruise operators could be some of the riskiest travel stocks of all. They were one of the market's hardest-hit industries as COVID-19 swept the world, and they've been one of the slowest industries to recover. Indeed, earlier this month, we flagged cruise line firm Royal Caribbean (RCL, $79.43) as a high-risk stock to avoid.

Nothing has changed on the risk front – RCL still stands to suffer mightily if COVID remains a major factor behind travelers' decisions. But it also has much to gain once the coronavirus is more concretely in the rear-view mirror. And the pros are starting to see the stock in a kinder light.

Royal Caribbean cruises are more of a destination in and of themselves rather than just a ship you take to somewhere else. Surf simulators, water slides, bumper cars, musicals – those sound like amenities you could find at a theme or water park, but you can also find them onboard an RCL cruise.

This appeals to travelers with an "if you're going to go, go big" mantra, and there were clear signs people were acting on that urge earlier this year. In a Q1 conference call, Royal Caribbean CFO Jason Liberty noted that March 2021 bookings equaled those during the firm's peak "wave" month in 2019, reflecting an enormous amount of pent-up demand.

Things continued to look good for RCL during the second quarter, with bookings up 50% over Q1. UBS analysts (Buy) note that although the Delta variant has had a "modest impact" more recently on close-in bookings, "Booked load factor for 2022 continues to be within historical ranges, as RCL focuses on holding price as demand for 2022 accelerates."

Just tread carefully. UBS writes that at current liquidity of about $5.0 billion, "at the cash burn rate of around $330M, RCL would have around 15 months of liquidity in a zero-revenue scenario." While a zero-revenue scenario seems unlikely – Royal Caribbean expects to have 100% of its fleet in service by spring 2022 – a significant step back in the fight against COVID could drastically shift sentiment toward this stock.