The Travel Stocks I Bought Early in the Coronavirus Pandemic

Ever since the U.S. began experiencing its first big surge of coronavirus cases in March, my wife and I have been maintaining a position in five travel stocks. We have been making a contrarian bet that the companies we hold shares in will recover once the pandemic ends.

Those of you who are regular readers may view this as being contradictory to the Individual Investor Wealth-Building Process I’ve been rolling out over the past several months. It’s not. Even within the context of a long-term plan for how you will invest, there can be room to speculate. The key is to do so in a defined manner.

I’ll share with you how I’ve gone about speculating in travel stocks. And, yes, I’ll name the stocks we were holding as well. Before I do so, I want to emphasize that this is not a recommendation to buy any of the five stocks. Rather, this week’s commentary simply provides a real-life example of how an individual investor can adhere to a long-term plan and still seek to take advantage of special situations.

Let’s start with our goals and tolerance for risk since both should drive all other investing decisions. Our primary goal is funding retirement. It’s still many years way. My willingness to tolerate market volatility and having a strategy for coping with it (portfolio rebalancing) plus my wife’s understanding of the benefits of long-term investing allows us to handle a high level of risk. We also have a combined high allocation to index mutual funds and exchange-traded funds (ETFs). This gives us an additional ability to tolerate the risk of individual securities since we are getting “the market’s” return for a large part of our portfolio.

Nearly all of the individual stocks we hold are either very long-term holdings or follow the same strategy used for VMQ Stocks, which I oversee. It’s very rare for us to speculate on stocks.

A bit of background will explain why we chose to “sin a little.” We were both traveling regularly before the pandemic and had a cruise scheduled. When Norwegian Cruise Line offered to apply the cost of our late-March cruise toward a future booking, we canceled the trip and took the credit.

Our assumption—and the assumption of the friends we were supposed to take the trip with—was that the travel industry would bounce back once the pandemic ended. Furthermore, we assumed all of those cruise company credits would either be eventually used (leading to on-ship and excursion spending) or expire worthless. So, I decided to look at the valuations of travel stocks.

Using AAII’s Stock Investor Pro, I downloaded data for nearly 60 travel stocks using data as of March 6, 2020. I then whittled down the list to primarily U.S.-based hotels, airlines, cruise companies and travel agencies. The current versus historical average valuations (price to book, price to earnings and price to sales) for each stock were then looked at as well as their Z double prime scores. The latter measures whether a company is at risk of going into financial distress.

We settled on five stocks: Delta Air Lines Inc. (DAL), Southwest Airlines Co. (LUV), Norwegian Cruise Line Holdings Ltd. (NCLH), Royal Caribbean Cruises Ltd. (RCL) and Expedia Group Inc. (EXPE). Of the five, Southwest is the primary airline we fly on and we have taken cruises on Royal Caribbean. As stated above, we have a credit for a future Norwegian cruise. We passed on hotel companies because their valuations at the time did not reflect significant discounts relative to their historical averages.

The mixture of industries and companies was purposeful. Investing in the travel sector was risky enough—we didn’t want to increase the risk by focusing on one company or industry.

Notice the date: March 6, 2020. We did not know the full extent of the coronavirus pandemic or its impact on travel at that time. So, we staggered our purchases. We bought shares for all five stocks on March 9. We then added to our positions with larger purchases on March 16 and 17 after their share prices and the overall market fell. Spreading out the purchase dates was something we planned to do before the first purchase was made.

Given the high level of risk, we took two other steps. The first was that we defined beforehand the maximum we would invest in these stocks. It was an amount small enough not to harm our goals if we were wrong but large enough to give our savings a boost if we were right. We also isolated the stocks to a single IRA account. Doing so made it easier to track how much is allocated to them.

Fast forward to today, and we still hold shares in all five stocks. They remain very risky, as can be evidenced by their A+ Investor Quality Grades of D or F. Air travel remains depressed. Just 596,475 people passed through TSA checkpoints on Tuesday versus 2.15 million a year ago. Royal Caribbean has offered limited sailings out of foreign ports, while Norwegian has canceled all sailing through the end of this year—and potentially longer.

In between March and now, these stocks have been very volatile. We have used the volatility to take some profits, given the risk of at least one of the companies going bankrupt. The proceeds from those sales have been put into a broad-market ETF. The combination of zero-dollar brokerage commissions and the tax advantages of an IRA made doing so feasible. Taking smaller profits was also part of our plan before we made the initial investments. The broad-market ETF is being used to maintain an equity allocation, in accordance with our broader allocation targets.

There are a few takeaways I’d like to leave you with. We went into these stocks with both a plan of action and an understanding of the potential downside. We determined how much we would allocate to all five stocks before we made the initial investments and have stuck to that number. We didn’t try to time our investments but did stagger the purchases. Perhaps, most importantly, we’ve neither panicked nor fallen in love with the stocks. They are risky and so the volatility has never bothered us. At the same time, if travel stays depressed for a longer-than-anticipated time after the pandemic ends, we’re prepared to walk away.