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I've been participating in an investing Facebook group hosted by my colleague Joseph Hogue, CFA, of My Stock Market Basics. There, I've witnessed patience in long-term investing and reasonable cautiousness as well as excitement surrounding the opportunity to “buy low.” The topic of purchasing airline and cruise stocks has arisen more than once. My initial reaction: whaaaat???
Then I saw a tweet from Roger Whitney, CFP. He reports that after calming his clients down and convincing them not to sell stock in this down market, they then ask if they should buy stock in airlines. Others in the financial planning and advisory space tweet that they've had similar conversations.
The collective reaction seems to be: whaaaat???
My Take on Travel Stocks
I'm not a financial advisor and not qualified to render personalized advice. Take what I say with a grain of salt. To the question “should I buy cruise lines on sale?” (or other similar types of travel-related stocks), “no” is my answer.
All that said, I still own Disney (DIS), which operates in the travel industry and runs cruises. It could be a good buy though I'm focusing on other financial and non-financial actions now, like finishing my tax returns, contributing to a Roth 401k, and shopping for groceries online. (Here I'll insert that doing nothing with an investment portfolio is a valid response to market unrest.)
The One Catch About Buying Low
Still, after some consideration, I can see that posing the question about cruise lines is a reasonable one, especially given the emphasis on buying low. We've heard that the secret to investing is to “buy low and sell high.” That's still holds true. We can now buy low, or at least what seems low compared to a few weeks or months ago. The other part of the equation, “sell high,” is the problem.
The current situation prompts me to add a piece of information that's missing from my earlier writings. I've cautioned to avoid paying too much for a share of a company's stock. I've written about using a discounted cash flow (DCF) to estimate an appropriate price per share.
That advice is still solid. Right now seems to be a great time to buy shares that are bargain priced. But, you'll want to adjust for the possibility of slowing growth, stagnant sales, or decline in sales and cash flow. These can be incorporated into valuation models.
More importantly, you'll want to make sure that the companies you buy now will still exist in the coming years. In business classes, we called these companies “going concerns.” Put more simply, will the cruise line that's selling at a bargain-basement price still exist in the future?
I don't have a crystal ball and so I have no idea whether airlines, hotels, and cruise lines as an industry or which corporations may survive and thrive.
Businesses Will Reinvent Themselves and Their Revenue Streams
I have no doubt that many companies will reinvent themselves.
Right now, many businesses are reinventing themselves. Local farmers are moving from supplying restaurants to no-contact home delivery. Medical offices are eliminating their waiting rooms. My bike shop is offering curbside service and is busier than ever with gyms being closed. Gravel bikes, which have been emerging as a hot new segment in cycling, may become even more popular as solo rides in less-traveled areas become more popular than group social rides on more heavily-traveled roads.
Airlines may cut the number of flights but charge more for tickets and premium services. They could adopt their own passenger screening systems to protect their employees.
Hotels may adopt rigorous cleaning methods and assure their housekeepers receive a living wage at the same time. And since people may need to find lodging that facilitates 14-day quarantines for arriving visitors or sheltering in place for others, businesses that provide lodging may discover a new revenue stream.
Perhaps cruise lines will do the same. They may develop methods of cleaning thoroughly and quickly. They could even find ways to operate with renewable energy. Still, that many cruise lines cater to older adults who may be more at risk of serious illness is a concern that I can't imagine being resolved easily. On the other hand, I couldn't imagine a pandemic so that's certainly not my strength.
Similarly, I am familiar with business models changing and businesses shutting down. You don't have to look that far back into history to notice these changes. Many brick-and-mortar stores closed when they couldn't compete with online stores and rock-bottom pricing.
A Strong Balance Sheet Still Counts for Something
Even the most innovative companies and creative thinkers may not survive temporary bans on their business operations. They'll need a strong balance sheet with lots of cash and little debt.
As personal preference, with just a few exceptions, I haven't focused on buying travel stocks. So, I'm not going to embrace them now. I may miss a great opportunity. But I'm more interested in stability as I plan for the days ahead. Your situation, point of view, and passion for travel companies may be much different from mine.
Now, as always, investing is about buying parts (shares) of viable companies that generate cash. If you're struggling to know where to place your energy, consider focusing on this aspect of the future.
How are you making decisions about companies to buy?