The past 10 weeks have taken Wall Street and investors for quite the ride. The spread of the coronavirus disease 2019 (COVID-19) led to a halt in nonessential business activity in most U.S. states and displaced more than 30 million workers in a little over a month. It's the most abrupt decline in economic activity in history, and it wound up leading to the quickest descent into bear market territory on record -- it took the S&P 500 just 17 trading days to decline 20% from its all-time closing high.
Amazingly, equities have bounced back almost as quickly as they fell. Although the benchmark S&P 500 remains down for the year, it retraced more than 60% of its losses at one point last week.
Image source: Getty Images.
Brand-name travel stocks aren't necessarily a bargain
A number of high-growth industries, such as technology and biotech, have been among the quickest to rebound from their lows. These are industries only expected to be adversely affected by COVID-19 in the near term. Meanwhile, travel stocks have consistently been some of the worst performers, even amid this rebound.
As Berkshire Hathaway CEO Warren Buffett noted during his company's virtual shareholder meeting this past weekend, the world has changed for the travel industry, and most notably airline stocks. If long-term-oriented investor Warren Buffett fails to see light at the end of the tunnel for much of the travel and leisure industry, then perhaps it's time for investors to rethink their investment thesis for the group.
While there are no doubt a handful of travel stocks that have more than enough capital to weather this storm, there are an equal amount of brand-name companies that look to be in deep trouble and should be avoided like the plague. Here are three such brand-name travel stocks you'd be smart to stay away from.
Image source: American Airlines.
American Airlines Group
One of the four major U.S. airlines that Buffett announced his company had completely sold out of in April is American Airlines Group (AAL -2.18%). American is one of the best-known names in the airline industry, and it currently has the largest fleet of all U.S. majors. However, its business could be adversely effected for years to come by the coronavirus, and its balance sheet is a mess.
For instance, at the beginning of April 2019, approximately 2.4 million people were being screened daily by the Transportation Security Administration in U.S. airports. By the beginning of April 2020, this figure was down to about 124,000 people being screened daily. Airlines have had little choice but to cut back on scheduled flights and operate some existing flights without maximum efficiency so as to uphold social distancing standards. Even when restrictions begin to be lifted, it's unclear when people will feel comfortable taking to the skies again.
Making matters worse, American Airlines got far too aggressive at an inopportune time with regard to upgrading and modernizing its fleet. As my Motley Fool colleague Adam Levine-Weinberg notes, American wound up choosing to retire nearly four dozen Boeing 737-800s well before it was time to replace them. This has ballooned American Airlines' net debt beyond $30 billion, leaving it with little financial flexibility. Plus, even when air traffic begins getting back to normal, American will be stuck with a glut of aircraft, more so than any of its peers.
Frankly, I'm not sure there's any real value to American Airlines' stock, and I'd suggest avoiding it above all other travel stocks.
Image source: Getty Images.
MGM Resorts International
Though I'm loosening the definition of "travel stock" a bit given that MGM Resorts International (MGM -0.33%) is a hotel and casino operator, the point is that the vast majority of people visiting an MGM property are likely doing so while on vacation or while traveling. In my mind, that qualifies it as a genuine travel stock -- and one to avoid like the plague.
As you can imagine, casino operators have been beaten to a pulp by the coronavirus pandemic. Casinos on the Las Vegas Strip were forcibly closed in mid-March to stem the spread of COVID-19. However, no casino operator is more adversely affected by this closure, in my view, than MGM Resorts. MGM generates close to half of its revenue from its Las Vegas Strip properties (MGM Grand, The Mirage, and Bellagio), and another quarter of its sales from other casinos operating throughout the United States. For as long as COVID-19 is a problem in the U.S., MGM is going to be down about 75% of its revenue.
But even after casinos reopen in the U.S., things aren't going to simply bounce back overnight. Initial guidance provided by Nevada's regulators states that casinos will need to limit occupancy to 50%. Though this will likely result in a one-for-one-type decline in slot machine revenue, it'll result in an even greater adverse impact on table games, where perhaps only two people are allowed at a table instead of six. Slots and table games are where casino operators generate the bulk of their revenue.
Furthermore, April's casino revenue from Macao, where MGM generates the final quarter of its revenue, declined 97% year over year despite reopening to the public. This demonstrates how difficult it'll be for tourist destinations to lure back gamblers.
Given MGM's more than $14 billion in net debt and dismal outlook for 2020 and 2021, it looks like a travel stock you can easily avoid.
The Carnival Pacific Jewel anchored off port. Image source: Carnival.
Carnival Corp.
Another travel stock that's bound to make investors sick to their stomachs should they buy it is cruise line operator Carnival (CCL 1.49%).
Of all the travel industries hit by COVID-19, it's cruise lines that might be the absolute last to see their restrictions lifted. On April 10, the Centers for Disease Control and Prevention ruled that cruise ships should not set sail for another 100 days, or until certain circumstances are met, such as the coronavirus no longer being a public health emergency. This ruling is actually an extension of a no-sail order implemented on March 14. In other words, cruise ships could be parked at their ports for perhaps 130 or more days with no means of generating revenue.
What's more, cruise lines that include Carnival are under serious fire for how they conveyed information to their passengers and crew regarding the coronavirus. For instance, a class action lawsuit has been filed against Costa (a subsidiary of Carnival) for allegedly concealing infections onboard the Costa Luminosa and purportedly blocking certain TV channels that would have shown the scope of infections worldwide. Lawsuits may become more common in the coming months as trust in Carnival and other cruise operators has been all but lost.
Then there's Carnival's balance sheet, which had close to $1.4 billion in cash and equivalents and more than $14 billion in debt on it as of the end of the fiscal first quarter. Sure, the company had $11.7 billion in liquidity, but it may need every penny of it given how long it might take for passengers to return. In my view, nothing short of a highly effective COVID-19 vaccine would make Carnival stock worth considering for your portfolio.