Travel and leisure stocks could be ideas of cyclical value for consumers

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AAs the Omicron strain of the coronavirus pandemic spreads at a seemingly unrelenting rate, some investors are increasingly concerned about travel and leisure stocks.

These concerns could eventually give way to opportunities with strengths such as ETF ALPS Global Travel Beneficiaries (NYSEARCA: JRNY). The consumer discretionary sector, home to many JRNY components, is coming off a strong fourth quarter, raising some concerns that the sector is overvalued.

The group “trades with a median premium of 3% compared to our estimates of fair value. Despite this, valuations in the space have become more attractive, with 30% of the sector’s equities trading in 4 or 5 star territory (a marked improvement from 16% three months ago) ”, Says Morningstar Analyst Erin Lash. “Against this backdrop, we believe that travel and leisure is ripe for investment, as we do not expect the increase in the number of cases to permanently depress consumers’ desire to travel.”

JRNY, which tracks the S-Network Global Travel Index (TRAVEL), allocates more than 46% of its list to consumer discretionary stocks. Its second largest sector exposure is industry at 27.71%, the bulk of which is airlines.

Along with a diverse lineup, one of the main advantages of JRNY is what the exchange traded fund avoids, namely cruise lines. That’s not to say that some of these companies will never appear in the fund, but for now, it’s a bonus that they aren’t in JRNY as cruise lines have a documented track record of being very sensitive to negative news about coronaviruses.

In addition, if various countries force these companies to re-moor ships, they could be punished with a zero-income operating environment, and because some operators in this category are not incorporated in the United States, they are not not eligible for government assistance.

Of course, what’s inside JRNY matters more than what’s excluded. One of the potential strengths of the ETF this year is its exposure to casino stocks, especially those with a strong Las Vegas footprint.

In a note to clients on Friday, Wells Fargo analyst Daniel Politzer spoke favorably of Boyd Gaming (NYSE: BYD), Caesars Entertainment (NASDAQ: CZR) and MGM Resorts International (NYSE: MGM). He calls Boyd a “free cash flow machine” while noting that the 2023 estimates on MGM are conservative. Politzer adds that Caesars has a free cash flow yield of 11% and offers upside potential of 40%. This trio combine for about 3.3% of the JRNY roster.

Other travel and leisure ETFs include the VanEck Vector Set ETF (BJK) and the US Global Jets ETFs (JETS).

For more news, information and strategies, visit the website ETF building block channel.

Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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