The travel industry had a near-death experience because of COVID, with revenues falling 75% in 2020. Now, according to a report from consultant McKinsey & Co., "travel is roaring back." Two-thirds of the 5,000 people the consulting firm recently surveyed worldwide said they were more interested in traveling now than before the pandemic.
Markets often anticipate such trends. For example, shares of Marriott International (MAR), the largest hotel stock by market capitalization (shares times stock price), have returned an annual average of 19.6% over the past three years, compared with 11.9% for the S&P 500 stock index. But some analysts see travel prospects dimming as the period of pent-up demand comes to an end. (Prices and returns are through September 30; stocks I like are in bold.)
Is it too late to buy travel stocks? Not at all. Travel is the future. It is a trend that won't quit, because going places to relax, learn and gather experiences is what people like to do as they get more disposable income. So, for example, as the proportion of people who are middle class in India doubles over the next 25 years, it is a near certainty that they will use a chunk of their new wealth to travel.
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The problem for investors is that the industry is fragmented, complicated and competitive, and it's not easy to buy. There is no seasoned exchange-traded fund that encompasses the entire sector. The best choice is tiny and new, but, unlike some others, at least it is truly travel-centric and diversified.
The fund, called the Defiance Hotel, Airline and Cruise ETF (CRUZ), skews in the right direction – toward hotels and cruise lines – but be aware that it does own a lot of airlines, which have been terrible.
Travel stocks are the key for investors
So let's look at individual stocks, starting with hotels. Under a popular model, individual investors, partnerships and real estate investment trusts (REITs) own hotels, which in turn are managed by companies such as Marriott that take a share of the revenues and profits. Marriott and its peers, such as Hilton Worldwide (HLT), also franchise hotels that are managed by independent businesses.
Marriott, with 9,000 properties and 1.6 million rooms, has a fiesta of about three dozen brands, from bare-bones (Fairfield, Courtyard) to commercial (Sheraton, Westin) to luxury (Ritz-Carlton, St. Regis). Hilton, with 1.2 million rooms, has Hampton, DoubleTree and Waldorf Astoria, among others.
The leading hotel operators are huge and profitable. Marriott has minimal needs for capital investment because owners pay for improvements. Like other hotel companies, it has been aggressively raising room rates since COVID, especially at the high end. The Wall Street Journal reports that "the number of U.S. hotels with an average daily rate of $1,000-plus in the first half of this year was 80, compared with 22 in 2019…. In Europe, the number of places tripled, to 183."
Stock-research firm Value Line projects that Marriott earnings will rise 11% annually for the next five years. The large-cap stock has quadrupled to a record high over the past eight years, but I think it's still decently priced. Hilton has a similar growth profile. Take your pick.
I also like the smaller Wyndham Hotels & Resorts (WH), the world's largest hotel franchisor with 24 brands (Ramada, La Quinta and others) and 877,000 rooms in 95 countries. Based on a consensus of analysts’ earnings estimates for 2025, the stock trades at a price-earnings ratio of 17 – a good deal for a business growing so fast. InterContinental Hotels Group (IHG) is a good way to play burgeoning markets in Asia, where it has 105 hotels, compared with 69 in Europe and North America combined.
Perhaps the best of the hotel operators is Four Seasons, but you can't buy the stock. It's private, owned mostly by Cascade Asset Management, Bill Gates' investment vehicle – an indication that the smart money understands the value of the sector. Also smart is LVMH (LVMUY), the Paris-based luxury-brand conglomerate, which now owns the chains Belmond and Cheval Blanc.
Real estate investment trusts, which provide the other route for hotel investing, pass their profits directly to investors. They have been lagging the operators badly in recent years, in large part because of high interest rates, as Host Hotels & Resorts (HST), the largest in the category, has demonstrated.
My favorite lodging REIT by far is Ryman Hospitality Properties (RHP), which owns large and profitable convention hotels under the Gaylord brand, including Opryland. Ryman has a dividend yield of 4.1%, but remember that REIT payouts can fluctuate, or disappear entirely.
Cruises are back
When COVID hit, it looked as if the cruise industry had hit an iceberg. But this year, an estimated 36 million people will take a cruise, and the figure is projected to reach 40 million by 2027, compared with 30 million in 2019.
Cruise ships are getting bigger and better. Royal Caribbean (RCL) recently launched the world's largest, Icon of the Seas, which is almost a quarter-mile long and carries 10,000 passengers and crew.
At the end of 2019, Royal Caribbean, which also owns the Celebrity and Silversea brands, traded at $134 a share. It traded at $29 in the depths of COVID but has since jumped. Despite a massive gain in revenues, the stock trades at a forward P/E (price-to-earnings ratio) of merely 13 for 2025, based on analysts' estimates.
What about Carnival (CCL), the largest cruise line, with brands such as Princess and Cunard? Shares fell 80% during COVID and have barely recovered. A big reason is the company's $28 billion in long-term debt, mainly incurred to stay afloat during the pandemic. But Carnival is paying off its loans and recently got an upgrade from S&P. Bookings for 2025 have set a record. It’s riskier than Royal Caribbean, but Carnival has more room to grow.
If the sector continues to boom, then a major beneficiary will be the largest travel company of all by market capitalization: Booking Holdings (BKNG), which owns such online reservation services as Booking.com, Priceline, OpenTable and Kayak. Earnings are rising briskly.
In the same space is the much-smaller Expedia Group (EXPE), whose other brands include Vrbo (for vacation rentals) and Travelocity. Airbnb (ABNB) has been a disappointment, its stock down 8% so far this year. But the company has loads of cash, and someone may be able to turn it around, so it's a good long-term play for investors with patience.
Finally, look at Trip.com Group (TCOM), a Singapore-based comprehensive travel company that handles reservations, tours, insurance, even online flight check-ins. With Chinese travelers as its main customers, the company's stock soared but then crashed with COVID and the slowdown in China's economy. Now it's back to its all-time high of seven years ago.
Of course, all of us wish we could have bought these travel stocks in the depths of COVID, but there is no need to wait for another catastrophe. It's hard to think of a better sector for this century than travel.
James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the stocks mentioned here. You can contact him at JKGlassman@gmail.com.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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