Investors bought the dip during the pandemic, and rightly so, because airlines and hotels have bounced strongly from the 2020 lows
The month of March marked one year since the World Health Organization (WHO) declared the COVID-19 virus to be a pandemic. At that time, stock markets suffered as panic spread across financial markets.
Industries perceived as being more exposed to the pandemic declined the most. Within the tourism industry, airlines suffered a big drop, especially after investing legend Warren Buffett announced that Berkshire Hathaway sold its entire stake(s) in the industry.
Fast forward to March 2020, and the benchmark S&P 500 index returned over 40%. This was a staggering achievement considering that at one point in 2020 it triggered the circuit breakers designed to stop the decline in a bearish market.
In this context, it is hard to believe that the companies worst affected by the pandemic have beaten the S&P 500 index. Yet they have, with some delivering more than double the return.
Airlines Lift Off From the Lows
While the dip in the airlines is one for the history books, the rise from the lows is more than impressive. This is especially true if we consider the inherent risk and the nerve of investors willing to bet that the airlines would bounce back.
Instead of being scared, investors have bid for the major US airlines, with American Airlines (for example) delivering double the S&P 500 performance.
The hotel industry has also enjoyed a strong comeback. Take Marriott Vacations Worldwide, which delivered returns of 103% to dwarf the S&P 500 benchmark.
Most of the “relief” rally came on the back of two major events: one was the announcement of imminent vaccines last November, and the other was the new US administration moving faster than expected to deliver more fiscal stimulus.
Before arguing that the rise makes no sense because all these players still suffer from a lack of cash flow, we need to think about how investors value a business in terms of the present value of future cash flows.
In summary, the tourism and entertainment industries’ gradual reopening continues. In the absence of any hiccups down the road, these two industries will likely grow even faster to exceed pre-pandemic levels as restrictions are lifted.