As peak vacation season arrives, here’s why some are bullish on travel stocks

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Summer is here, which means vacation time for many Canadians. While that usually involves spending money, there are also ways for investors to make money from vacations – especially with signs the travel industry has almost recovered from its virtual shutdown during the COVID-19 pandemic.

Global travel has staged a remarkable rebound, especially over the [ast year. According to a recent report from the London-based World Travel & Tourism Council (WTTC), the travel and tourism industry generated an estimated US$10-trillion in 2023, with almost half of the 185 countries it follows recovering to at least 95 per cent of pre-pandemic levels.

The WTTC expects the trend to continue in 2024, with many regions surpassing 2019 levels by end of year.

McKinsey & Co. is even more bullish. The management consulting company’s 2024 report on tourism and hospitality said the industry is set to soar, with new source markets and destinations, growing demand for experiential and luxury travel, and innovative business strategies altering the landscape.

The travel recovery trend has caught the investment industry’s attention.

“The near- to mid-term outlook for the sector looks healthy,” says Kushal Agarwal, portfolio manager at Harvest Portfolios Group Inc. in Oakville, Ont.

He notes the demand for travel and leisure rose in the past 15 years, driven by factors such as baby boomers retiring and travelling more, and affordable air travel. He believes these long-term drivers remain intact post-pandemic.

“Generation X and millennials are now reaching their peak earning years and are joining the baby boomers, leading to increased multi-generational demand for the travel and leisure industry,” he says.

Harvest ETFs launched the $75.9-million Harvest Travel and Leisure Index ETF TRVL-T in January, 2021. The exchange-traded fund (ETF), which invests in 30 large-cap companies, has posted a 6.7-per-cent annualized return since inception and is up 7.8 per cent this year as of June 30.

Mr. Agarwal says consumer preferences for spending on experiences versus goods, and the reduced sensitivity to negative economic factors among the heaviest travellers, who tend to be in the top 10th percentile for income, are also positive for the industry.

As far as specific investment themes, Mr. Agarwal favours cruise lines, booking websites and hotels.

In cruise lines, he notes the big three players (Royal Caribbean Group RCL-N, Carnival Corp. CCL-N and Norwegian Cruise Line Holdings Ltd. NCLH-N) capture about 75 per cent of the industry globally, and have a competitive advantage in pricing. As well, the customer base is expanding, with the share of first-time passengers growing.

Mr. Agarwal favours Royal Caribbean, the fund’s fifth-largest holding making up 6.9 per cent of the portfolio as of June 28, because of its higher operational efficiency, allowing it to capture better margins.

He also likes travel booking websites thanks to their diversified businesses, which aren’t reliant on any one kind of travel, provide exposure to the fast-growing short-term and alternate accommodation space, and have higher operational efficiency boosted by artificial intelligence.

His top pick in the sector is Booking Holdings Inc. BKNG-Q, the owner of leading brands including Booking.com, Kayak, OpenTable and Priceline.com. He likes the company – the ETF’s largest holding at 11.3 per cent – for its diversified business and exposure to the higher-growth area of connected trips, or end-to-end personalized travel booking.

In the hotels’ space, Mr. Agarwal notes the bigger names such as Hyatt Hotels Corp. H-N, Hilton Worldwide Holdings Inc. HLT-N and Marriott International Inc. MAR-Q are moving increasingly to an “asset light” management-fee-based model, which has helped them increase operational leverage and margins.

“Luxury properties owned by these brands have been able to attract demand from the high-end consumer, enabling higher margins and resilient revenue,” he says.

Hilton and Marriott are the ETF’s second- and third-largest holdings, each accounting for about 10 per cent of the portfolio.

Gordon Reid, president and chief executive officer of Goodreid Investment Counsel in Toronto, also likes the travel industry but says it’s important to be selective.

Mr. Reid favours online travel providers Booking and Buenos Aires, Argentina-based Despegar.com Corp. DESP-N. Booking is much larger, with a more than US$130-billion market capitalization, while Despegar has a valuation of less than US$1-billion. But Despegar is focused specifically on Latin America, a high-growth market with a younger demographic.

He calls Booking’s valuation “reasonable,” with little or no premium to the market, yet its growth rates in revenue, earnings and cash flow are much higher than the average company.

Despegar is in a similar position, he says: “Very reasonable valuations for a company growing rapidly with a long runway of growth potential.”

However, other areas of the travel industry are tricky, Mr. Reid says.

“The airline industry has a self-destructive history. The better things get, the more industry in-fighting and competition leads them to a downturn,” he says.

For that reason, Goodreid Investment Counsel has rarely invested in airlines. He also notes the cruise industry took a huge hit from COVID-19.

“Balance sheets became toxic as debt was the only path to survival. They’re doing well today but we are cautious,” he says.

He avoids hotels, saying they depend on quality management to succeed and an intensive amount of research is needed to highlight the best.

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