Leisure Stocks Might Be Consumer Cyclical Value Ideas

As the Omicron strain of the coronavirus pandemic spreads at a seemingly unrelenting pace, some investors are growing apprehensive regarding travel and leisure equities.

Those concerns could eventually give way to opportunities with assets such as the ALPS Global Travel Beneficiaries ETF (JRNY). The consumer cyclical sector, which is home to many JRNY components, is coming off a strong fourth quarter, prompting some concern that the sector is overvalued.

The group is “trading at a median 3% premium to our fair value estimates. Despite this, valuations in the space have become more attractive, with 30% of stocks in the sector trading in 4- or 5-star territory (a marked improvement from 16% three months ago),” says Morningstar analyst Erin Lash. “In this context, we think travel and leisure is ripe for investment, as we don’t expect rising case counts will permanently depress consumers’ desire to travel.”

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

In addition to a diverse lineup, one of the primary benefits of JRNY is what the exchange traded fund avoids, namely cruise operators. That’s not to say that some of those companies won’t ever appear in the fund, but for now, it’s a bonus that they’re not in JRNY because cruise operators have a documented history of being highly sensitive to negative coronavirus news.

Additionally, if various countries force these firms to dock ships again, they could be punished by a zero-revenue operating environment, and because some operators in this category aren’t incorporated in the U.S., they aren’t eligible for government assistance.

Of course, what is inside JRNY matters more than what’s excluded. One of the ETF’s potential avenues of strength this year is exposure to casino stocks, particularly those with heavy footprints in Las Vegas.

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 2023 estimates on MGM are conservative. Politzer adds that Caesars has an 11% free cash flow yield and offers 40% upside potential. That trio combines for about 3.3% of the JRNY roster.

Other travel and leisure ETFs include the VanEck Vectors Gaming ETF (BJK B) and the U.S. Global Jets ETF (JETS C).

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