Coronavirus-related shutdowns have turned some boring industries into potential world-beaters. Entire sectors have been hammered by the stock market, as revenues have evaporated because of stay-at-home orders. For optimists who think that this too shall pass, this market turmoil gives investors an opportunity to buy sector leaders at rock bottom prices.
Industries that have been nearly killed by the lockdowns include airlines, hotels, movie theaters, restaurants, and cruise ships. Right now these stocks are proxies for our war against COVID-19. If you think the coronavirus is a new normal for the next several years, avoid these sectors like the plague. Many of these companies carry huge debt loads, and stay-at-home measures that last for years will send several major companies into bankruptcy court.
Image source: Getty Images.
However, if you are bullish on coronavirus vaccines, and you think humanity will defeat this COVID-19 threat sooner rather later, investing in these bearish sectors now makes a lot of sense. Several stocks have witnessed a 50% drop because of the coronavirus; a return to normalcy implies a double from these levels. This is why I bought shares of Royal Caribbean (RCL 0.04%), IMAX, and Park Hotels & Resorts after the coronavirus lockdowns hammered these stocks.
It looks like many Robinhood investors have the same idea. In particular, Robinhood investors are very bullish on airlines and cruise ships right now, buying the stocks of all the major airlines and cruise lines despite the ugly numbers. My two favorite Robinhood stocks in these demolished sectors are United Airlines (UAL -2.52%) and Royal Caribbean.
Why United is the best candidate for airline outperformance
If you're investing in airlines because of the lockdown beatdown, United is a strong candidate to recover. For starters, it's very clear that United's stock is being punished almost entirely because of the coronavirus. Just look at the company's 10-year chart.
Data from YCharts.
The company's new CEO, Scott Kirby, joined the company in 2016. A lot of industry observers think Kirby is one of the best in the business. Over the last several years, United had been outperforming the S&P 500, up until COVID-19 hit. The drop-off was severe, and the recovery is likely to be just as sudden.
On Monday, when Pfizer announced positive news from its pivotal vaccine trial, all the airline stocks ran up 20% or more. We'll see similar spectacular returns when COVID-19 vaccines start receiving FDA approval.
Why buy shares of United and not Delta or American (AAL -2.18%)? Interestingly, all three of the majors have similar revenue totals right now. But United's stock is a lot cheaper than Delta's. And while American's stock price is the cheapest of the three, American has scary debt compared to its cash.
| Airline | Revenue | Price-to-Sales Ratio | Cash | Debt |
|---|---|---|---|---|
| United | $23 billion | 0.43 | $14 billion | $34 billion |
| Delta | $24 billion | 0.82 | $21 billion | $45 billion |
| American | $24 billion | 0.21 | $8 billion | $41 billion |
Data source: Yahoo! Finance.
Royal Caribbean will sail higher
If you had to name the sector that's been hardest hit by the coronavirus, it's got to be cruise ships. Airlines, hotels, and restaurants have all been impacted, but at least these businesses are still operating. The cruise lines have seen their revenues crash to zero.
Actually for Royal Caribbean, it's fallen to below zero. In the company's most recent quarter, revenue plummeted from $3.2 billion in the year-ago quarter to negative $33.7 million. That's ugly but hardly a surprise. You can't make money if your ships can't sail.
On the other hand, next year's comps are going to be amazing. Revenue should skyrocket from nothing to $1 billion or more. In my opinion, all the bad news from COVID-19 has already been priced into this stock. The market is starting to look ahead and form opinions about what this business will look like in 2021.
Royal Caribbean's stock has zoomed since March. From a low of $20, it's run up to $70. If you looked at a six-month stock chart, you'd have no idea this business has been shut down by the government.
Data from YCharts.
Right now, Royal Caribbean is planning to resume operations at the beginning of the year. Is there any demand for cruises? Yes indeed. "We have been both humbled and surprised with the amount of bookings we are seeing for 2021, with literally no marketing efforts and frankly very little good news," said Chairman and CEO Richard Fain.
The Centers for Disease Control and Prevention (CDC) is on the verge of allowing cruise ships to sail again. But first, health authorities are asking the companies to run cruise simulations to see if they are ready to reopen. While it's still in the planning stages, a simulated cruise would include normal cruise activities such as dining, entertainment, and trips to island beaches. But it would also include practice scenarios for what would happen if a passenger tested positive for COVID-19, such as quarantine and cabin confinement.
Royal Caribbean has been inundated with emails from people who want to volunteer for a cruise simulation. "Royal Caribbean has some of the most loyal guests in the cruise industry, and we have been overjoyed with their interest to take part in our simulated trial sailings," company spokesperson Jonathon Fishman told CNN Travel. In one week, Royal Caribbean received over 5,000 emails from people who wanted to take part in the trial.
Robinhood investors are right -- airlines and cruise ships will recover from COVID-19. And the stocks of United and Royal Caribbean should zoom higher when that happens.
