In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Jason Moser to discuss the Standard & Poor's announcement that Penn National Gaming (PENN +3.73%), NXP Semiconductors (NXPI 1.56%), Caesars Entertainment (CZR +11.74%), and Generac Holdings (GNRC +0.87%) will be joining the S&P 500 index. Also, Carnival Corp's (CUK 0.99%) CEO predicts the cruise industry won't be back to normal until 2023, and airline stocks rise after the Transportation Security Administration (TSA) reports over 1.3 million people flew on a recent day. Plus, Chris and Jason dip into the Fool mailbag to discuss recent volatility and the importance of the right mindset.
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This video was recorded on March 15, 2021.
Chris Hill: It's Monday, March 15th, welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you.
Jason Moser: Good to see you, how's everything?
Hill: I got coffee, I'm good [laughs]. You don't need a little extra coffee when it's post-Daylight Savings.
Moser: I understand.
Hill: We're going to talk about travel stocks. We're going to talk a little bit about mindset because that is increasingly important for investors. But we're going to start with a little portfolio rebalancing. Standard and Poor's announced that four stocks are going to be joining the S&P 500, NXP Semiconductors, Penn National Gaming, Generac Holdings, and Caesars Entertainment. So if you have a basket of casino stocks, happy birthday to you with [laughs] Penn National and Caesars. This is one of those things, Jason, that I feel like the conventional wisdom is wrong, because the conventional wisdom that I hear about stocks being added to the S&P 500 is, oh, that doesn't really matter. I get that it doesn't affect the underlying business, but I think it actually does matter. I think it goes in the plus column. If all of a sudden companies that you own shares of are added to this massive index that all of these index [laughs] funds are based on.
Moser: Yeah, I couldn't agree more. I think in the long run we probably say it's not that big of a deal or many would say it's not that big of a deal, but generally speaking, I think it is a big deal too and I think it's for a number of reasons, but among others, you're part of this, we could call it just a Quasar exclusive club. They're not putting laggards in the S&P. There are laggards in the S&P and so that's why they rebalance it quarterly, but I think it's a sign that your business is of a certain quality that they feel comfortable in putting you in that exclusive club. If you look at the S&P, the origin of the S&P 500 goes back all the way back to 1923. This thing has been around for a while, the S&P 500 in some form. The S&P 500 as we know it now was introduced in 1957. But ultimately, as I mentioned, there is rebalancing every quarter. Ultimately, this is rebalancing based on the work of a committee. The committee I believe meets every month and they assess the businesses, the situation, how these companies are doing, they try to be deliberate and not willy nilly companies in and out of the index. They do try to keep turnover low. But there are points in time where longer term trends become a little bit more obvious, businesses that are winning in those particular spaces become a little bit more apparent.
I think that when you look at these businesses that are making that step into the S&P, I can see these long term trends. I mean, NXP Semiconductors, let's talk about 5G, the roll-out of technology, mobile, wireless, that plays right into that. Penn National Gaming, come on, we're talking about sports betting first and foremost, it's going to be a massive opportunity, and Penn certainly making a lot of investments in that space, Generac Holdings, listen, that's energy. Caesars Entertainment, another Penn National Gaming story. I certainly see why they're moving in when you look at the businesses that are moving out, they're just less than impressive at this point. It's not to say they're bad businesses, but they're just better options out there. You got Flowserve moving out, SL Green Realty moving out, Xerox moving out. Another one that everybody knows, Chris, Vontier. I mean, everybody knows Vontier. Nobody knows Vontier, Chris, nobody at all. I think generally speaking, I would be feeling really good if my company was added to the S&P 500 Index. I'd imagine these executive teams maintain a point of pride with this, and it will be interesting to see how they perform from here.
Hill: I will just point out, we're seeing a little boost to the stocks going into the S&P 500 today. Penn National Gaming, that stock is up more than 1,400% in the past 12 months. That's an insane ride up.
Moser: That's the long term trend exemplified right there. A lot of enthusiasm, a lot of excitement in that entire space, and I absolutely understand it.
Hill: Let's move on to travel, and there are really two bits and news here I wanted to get your thoughts on. The first is in the carnival industry where Arnold Donald, who's the CEO of Carnival Cruise Line, said in an interview, he thinks it's going to be at least two more tough years for the cruise industry. He really thinks it's going to be 2023 before that business bounces back to where it was before the pandemic. If you couple that with air travel, on Sunday, TSA screened more than 1.3 million passengers. Just on Sunday. That is still about 40% below the levels that they were screening in 2019, but it's the fourth day in a row of over a million people being screened for air travel. When you look at what's happening with airline stocks today, the rise across the board, there's obviously a lot of optimism there. I don't know about you, but I'm surprised at the fact that Carnival Cruise Line shares are up a little bit. I'm assuming it has a little bit to do with the old saw that the market hates uncertainty and one way to look at the CEO's comments is there is a light at the end of the tunnel. I would just point out that the tunnel doesn't appear until 2023.
Moser: [laughs] Well, to your point there in regard to uncertainty, just the idea that carnival leadership believes that they're going to be around to see 2023, and really, I'm not saying that facetiously. There was a time here where we were wondering would these cruise liners even really be able to make it. We were having that discussion often, and so, that they feel comfortable enough to make that assessment, I think is part of it.
It's really interesting to look at the differences in travel. We're talking about airlines and talking about cruise lines. With cruises, you've got a situation where it's two things that are going to be working against them, I think, to an extent in that it is global, so you're talking about some areas that are going to be better than others. Some areas are going to be better than others and that'll be fine. But their market opportunity in regard to where they're going to be going, it's probably going to be somewhat limited for the foreseeable future. It does feel like things are rolling out here domestically better than in other places around the world. But the other thing that struck me in regard to cruise liners, and I've never been on a cruise, I fell victim a little bit just to the stereotype. But then I looked up the data really to see if I could backup the stereotype, Chris. The old joke is that cruises are for old people. You think about cruises, you think about older folks playing shuffleboard and then maybe you grew up in the time of the love boat like you and I did, where that painted a little bit more of a romanticized version of young people enjoying those cruises. But in all honesty, there is something to the age thing here when it comes to cruises.
I looked at some of this data just to get a better idea, and according to Cruise Lines International Association, they have a global passenger report and this one is back in 2018, but these trends are relatively consistent. The average age of the cruise passenger was 46.7 years old, and that's been pretty steady over the past several years. But it's interesting when you start breaking down the age demographics of a cruise and how many people are going on cruises. If you look at the ages, 33% of all passengers were 60 years and older. If you add 50 years and older to the mix then that number goes to 51%. The reason why that matters, if it's not obvious, when we look at the data from COVID-19, clearly it is a virus that impacts older folks more so, 80% of the deaths are 65 years and older. The simple calculus there is if you're older, you need to be more worried. I think that probably keeps people on the mainland for a little while longer before they feel comfortable taking that chance to go out onto a cruise.
Maybe the vaccine does mitigate some of that uncertainty, some of that caution. Maybe folks feel a little bit better about doing it once they've been vaccinated. I am speaking to my mom and dad, they've gotten their shots and they feel great about it, they don't really feel too worried and my father's a physician so I take that to heart. Maybe as folks get vaccinated, they feel ready to get on out there and do things like cruises. But there's no doubt that cruise liners are dependent on older folks to keep those boats afloat, so to speak. If half of your customer base is going to be on the fence as far as taking a cruise anytime soon, I understand that 2023 timeline. Maybe he's also just being conservative there. I think probably that would make a lot of sense if they were just being a little bit more conservative, but we didn't see better numbers before 2023. I feel like we will, but I could be wrong.
Hill: With respect to the airlines, I feel like as a group, they do a pretty good job in terms of tweaking the pricing of airline tickets. They are pretty nimble when it comes to that. In terms of the growth of the airlines themselves, am I right in thinking that new orders is a metric to keep an eye on, because you hear a lot of talk from these airlines in terms of capacity. Not all of them have opened up every seat available within the plane, so that's a lever they can pull. They can increase the number of flights per day. But it seems like, if you're thinking about the longer-term health for some of these airlines, unless I'm missing something, I haven't seen anyone come out and say, "And we're so optimistic about the future that we've put in an order with Boeing or Airbus for 50 new planes."
Moser: I think it's certainly a metric to follow. I feel like right now the airlines have so many issues going on. As long as the fleet is OK, as long as the fleet is somewhat modern and safe, they're probably going to try to delay those orders a little while to be able to get the rest of the house in order. When things become a little bit more certain, then I think they can make those types of decisions with a little bit more confidence, but right now, airlines have been in the headlines for a lot of reasons. Definitely one thing to keep in mind.
Looking at the passenger traffic, ultimately, it's going to be that that passenger traffic is going to be really what dictates what these airline leadership teams do. It does seem like that trend is improving for airlines. We'll probably see a little bit less business travel on a permanent basis from this, but I don't subscribe to the notion of business travelers just going away. I think a lot of people actually really want to get back to it and I think a lot of people are ready to get back to vacation travel. Again, I think the difference between cruises and airlines is, on a cruise, you're confined to that one area, airlines, you have a lot more options. Airlines can get you all places to go do other things. It would make sense to me that the air traffic would start trending upward before the cruise liners do. It does feel like, again, back to what we were talking about, cruise liners, there are going to be some places that are better than others. It's going to be like real estate: location, location, location. You're going to travel to some places, other places you're probably not going to want to travel to for a little while longer, and so that will impact some decision-making. But generally speaking, it does feel like at this point, given what we know, it's going to be really difficult to get people to stop traveling at this point.
I think the enthusiasm, the optimism, there are reasons to feel like things are getting better. People are feeling a lot more confident about making plans now. As a side note, it was interesting, I was looking at a couple of stocks that we follow in our universe just to see how they performed over the last 12 months and year-to-date. It's really been astounding to look at TripAdvisor (TRIP 3.06%) and Booking.com (BKNG 1.09%), I think two very good indicators of the sentiment when it comes to travel. I know the headlines have always focused on Airbnb, but when you look at TripAdvisor and Booking.com, TripAdvisor over the last year, last 12 months, the stock is up +260%. Booking.com, up almost 70%, both outpacing the market nicely. If you look at it just year-to-date, TripAdvisor is up almost 120% and Booking.com a little bit less than 10%. You see, that's a bit of a sentiment gauge I think. Maybe not a perfect one, but at least it can give you something else to look at.
Hill: Our email address is [email protected]. We got a note from Will Harts in Richmond, Virginia. He writes, "I got into stocks close to the crash in 2020 and my experience is completely messed up since just about everything was going up. Now it seems like there's a 3% drop followed by a 4% increase each day. Are the market ups and downs always this dramatic? I'm still following the long term Fool philosophy, but why is the market almost rewarding day trading now? I know you don't have all the answers, but I would like some insight." Thank you for that, Will. We've talked about people like Will, all the new investors who have gotten into the market in the past year. [laughs] That's one of the reasons I like Will's email, because it confirms what we've been thinking about people like Will, which is it's going to be weird for those [laughs] people who had just started investing in March of 2020. It's like, "Everything I touched turns to gold."
Moser: [laughs] Easy money. It's certainly been a heck of a year and it is worth remembering that stocks do go down. I've seen it, I've witnessed it, I've felt the pain as you have too, Chris.
Hill: Absolutely.
Moser: The longer that you do it, the more you become witness to that. I think that first and foremost, generally speaking, no. I don't think this type of volatility, this type of daily movement is something that you should expect over the long haul and in normal times. I think one thing you can look at, we talk about the volatility index, the VIX, V-I-X. It's a real-time market index. Ultimately, it represents the market's expectations for volatility in the coming month. If you look at the chart of the VIX, ultimately, when fear and uncertainty are ramping, you see the VIX index move up, and then when things are a little bit more calm, the VIX falls. If you look at the last five years, if you just look at a chart of the last five years, you can clearly see over the last year, it's been exceptionally more volatile than it has been for the four previous. That makes a lot of sense given what we've been going through. I think it's probably fair to say that technology has opened up investing and day trading to folks that never would have tried it before.
There are all sorts of financial instruments out there that have increased liquidity, so it's understandable to see these types of moves. I don't know the data behind this, but it sure feels like there are a lot more growth style companies out there right now pursuing these nascent markets where they are growing but they're not profitable. They've got valuations where 40 times sales is normal for a lot of these companies. That's a bit odd to see. Price to sales feels like the new price to earnings in many cases and that's a bit worrying. But yeah, I think that generally speaking, as longer term investors, it's about focusing on the business, not the stock price, and understanding that the stock price is not always necessarily indicative of how the business is doing and then making sure that you understand that volatility really ultimately is the investors friend. For the long term investor, for the net buyer of stocks, which is what we are, we are looking to buy more stock than we sell, volatility is going to be your buddy. It just reminds me of that old Warren Buffett quote that he says, "You pay a very high price for cheery consensus, it won't be the economy that will do an investor's, it will be the investors themselves. Uncertainty is actually the friend of the buyer of long term values." I think it's always worth remembering that mindset focusing on that longer game, as we like to do. I know some folks think it could be kind of a cop out, but it absolutely isn't. It really does work. It just takes time in to actually see those results materialize. But once you see them materialize, trust me, you'll be a believer.
Hill: In the meantime, Will, get outside, take a walk down the ZZQ, which is a phenomenal barbecue joint in Richmond, and have yourself a nice meal. Because you know what, you can afford it. If you started investing in March of 2020, you can afford to pay for a good meal at ZZQ. Jason Moser, always good talking to you. Thanks for being here.
Moser: Thank you.
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery, the show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you tomorrow!
