International travel is set to rebound this year with the European Union planning to open their borders to vaccinated North American tourists come summer.
Yet investors are still underestimating the degree to which trips are going to pick up and provide a boost to some travel-facing firms, according to Pat Tchosik, a senior portfolio strategist at Ned Davis Research.
While share prices of some travel firms — like the rental-car provider Avis Budget (CAR), for example — have seen massive appreciation over recent months, other stocks are still lagging behind. And this presents a big opportunity for investors, Tschosik told Insider on Monday.
"I think there's a thesis out there that business travel and international travel is not going to come back," Tschosik said. "I think we'll surprise to the upside.
He continued, "A lot of these stocks are still way below where they were on a relative basis to the S&P 500. The cyclical rally's been powerful, way strong off the bottom. But this is, in my mind, kind of like the last frontier to give way and say 'the pandemic is over.'"
Tschosik is talking specifically about airline and cruise line stocks. He sees cruise lines gaining their customer base back as vaccinations continue and confidence that the virus has been defeated rises.
For airline stocks, Tschosik recommended investors look at TSA volume numbers. They are already at 70% of 2019 levels, he pointed out, and should continue their return to pre-pandemic levels as global vaccination rates increase.
But Tschosik also thinks airline investors are missing another piece of the equation when pricing shares of airline firms. He said investors are too focused on the permanent loss of business travel — which may indeed happen, Tschosik said — instead of profitability.
During the pandemic, many airlines reduced their capacities, he said, therefore cutting costs. He said this would allow airlines to actually be more profitable post-pandemic than pre-pandemic.
"These airlines got leaner, and I think that's important to know," Tschosik said. He added that he believes American Airlines, for example, could get back to 2019 earnings levels with 90% of their pre-pandemic volume because of the costs that they've cut.
7 stocks — and 1 ETF — to buy
In absolute terms, Tschosik believes certain airline and cruise line stocks have massive upside, and will return to their 2019 highs.
Tschosik's view is strengthened by the fact that most of the rest of the market — and the S&P 500 — have posted huge returns since bottoming in March 2020.
The seven stocks he likes most are Carnival (CCL), Norwegian Cruise Line (NCLH), Spirit Airlines (SAVE), American Airlines (AAL), United Airlines (UAL), Royal Caribbean (RCL), and Delta Air Lines (DAL). Tschosik also likes the US Global Jets ETF (JETS).
Carnival and Norwegian Cruise Line have the most upside potential from current levels, according to Tschosik — both would have to rise more than 100% from their current levels to reach their 2019 highs.
The seven stocks, along with the JETS ETF, and their upsides, are listed below.
The stocks would rise even more if they matched the broader market's performance since March 2020, Tschosik said.
For instance, the JETS ETF has 25% absolute upside from pre-pandemic levels, but 78% upside if it performs as well as the S&P 500 has over the last year-plus.
Tschosik said the bear case for the stocks is that they've taken on too much debt during the pandemic that will eat into margins, and that travel could not pick up to pre-COVID-19 levels.
But he isn't worried about these scenarios playing out.
"Number one, I think that leisure travel is going to blow away 2019 levels because there's pent-up demand because it's an even better economy in terms of customers flush with cash," Tschosik said. "Number two, they've done things to cut their expense."
As for a timeline on when the stocks will appreciate, Tschosik said he thinks they will post much of their gains by the end of summer 2021.
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