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One of the most important market sectors to be aware of is travel.
When things start to go bad in the economy, the first thing to get cut is business travel. That is usually a sign of grave things to come. Likewise, it is often one of the first things to get re-instituted when things are on the mend.
Travel is not only on the mend, it is on fire. Despite the economy’s sluggish growth, travel stocks of all kinds are doing exceptionally well. That’s because there has been a huge secular shift within the travel industry that has made it all the more profitable, above and beyond the natural desire for people to take vacations.
It all comes down to supply and demand. Right now, there is excessive demand and restricted supply in two primary areas.
Let’s start with airlines. After decades of excess capacity, the terrorist attacks of 9/11, crushing debt and high fuel prices, the airline industry had a stealth collapse. All the majors have now merged or are gone. Only Southwest Airlines (NYSE: LUV) experienced neither.
The mergers and bankruptcies have created a de facto oligarchy. That means fewer airlines are competing on routes, which means demand exceeds supply. Fares have risen dramatically as a result.
The airlines also caught on to being able to charge everyone for everything, and I expect charging us to breathe air isn’t far behind.
Then we have hotels. The demand for hotels – and the need for new hotel construction – is expected to exceed supply at least though this year, if not longer. As a result, the volume of hotel transactions has been and will continue to increase. Not enough hotels means higher prices can be charged.
Then there are the online travel reservation services, which are consolidating. All those airlines and hotel rooms have to be booked somewhere, and that’s why the online business has been seeing consistent growth of 20% in EPS year after year.
So which stocks do you buy?
I feel so strongly about the travel sector, I think you should own an airline, a hotel and an online travel booking company.
I surveyed the airlines a few months ago, and my position hasn’t changed. I would go with Southwest, mostly because it is so consistent with its product and its balance sheet is the strongest. Its cash flow also blows away the other major airlines, and it can now fly out of Love Field in Dallas, as well as internationally.
Southwest has $3 billion in cash and only $2.4 billion in debt. It generated $1.2 billion in free cash flow last year. It increased its dividend. It’s just a great company.
In hotels, you have many choices. Regular readers know I have only one selection in hotel REITs, because it is so obviously superior to any other holding: Ashford Hospitality Trust (NYSE: AHT).
Ashford outperforms every other hotel REIT on virtually every metric and has, by far, the largest insider ownership. I advise you to see just how strong the company is by looking at its investor presentation. It is also on sale for $9.70 right now and pays a 4.5% yield.
The online space has become very interesting since consolidation has left the market with only The Priceline Group (NASDAQ: PCLN) and Expedia (NASDAQ: EXPE). I also discussed these two companies before their buyouts of other competitors, and my opinion hasn’t changed.
Priceline remains the winner here. It is a GARP stock, with 20% EPS growth ahead of it, billions of free cash flow every year and billions in net cash.
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