5 Travel Stocks to Watch in the Fourth Quarter

Three travel stocks are among the best fourth-quarter performers over the past decade

by Kirra Fedyszyn

Published on Sep 29, 2016 at 1:09 PM

As the third quarter wraps up, traders are looking ahead to next week, when October and the fourth quarter begin. And they have good reason to be excited -- after all, the fourth quarter typically brings the best returns of the year. What's more, a recent study run by Schaeffer's Senior Quantitative Analyst Rocky White suggests that the S&P 500 Index's (SPX) 6% year-to-date return may be pointing to even better returns than usual.

This week, White ran a study of the best performing stocks in the fourth quarter over the past ten years, using only stocks with at least eight returns over the period. The 25 top performers are listed in the table below. From here we'll take a closer look at three equities with particularly impressive fourth-quarter returns over the last decade -- travel issues Alaska Air Group, Inc. (NYSE:ALK), Priceline Group Inc (NASDAQ:PCLN), and Royal Caribbean Cruises Ltd (NYSE:RCL).

Best fourth quarter stocks

Airline stock ALK has had a rough year so far, dropping 18.4% in 2016, including a 0.7% slip today to $65.73. Still, the shares have rallied 20.6% off their late-June annual lows, and recently bounced off support at their 80-day moving average. Over the past decade, the stock has been positive in the fourth quarter every single year, with an incredible average return of 20.8% for the period. And things could be looking up soon, as ALK has not only been a top fourth-quarter performer over the past decade, but also one of the best performers for the month of October.

Analysts are currently split in their opinions of the stock, but options traders seem to be betting on a repeat of history. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) Alaska Air Group, Inc.'s (NYSE:ALK) 10-day call/put volume ratio of 4.53 sits higher than 90% of all readings from the past year.

PCLN, meanwhile, has been steadily climbing the charts since bouncing back from its February low, as sits nearly 19% higher year-over-year at $1,471.01, after hitting a fresh record high of $1,481.78 earlier today. If past is precedent, even higher highs could be ahead. Over the last 10 years, PCLN has given a positive fourth-quarter return nine times, gaining an average of 12.3%.

It looks like that is exactly what options traders are counting on. PCLN's 10-day call/put volume ratio at the ISE, CBOE, and PHLX sits in the 82nd percentile of its annual range, at 1.35. And it's an appealing time to pick up Priceline Group Inc's (NASDAQ:PCLN) short-term options, as its Schaeffer's Volatility Index (SVI) of 19% is lower than 97% of the past year's readings. That means premium should be pricing in exceptionally low volatility expectations right now.

Cruise operator RCL has also enjoyed a positive fourth quarter for nine of the past 10 years, giving an average gain of 12.3% for the period. And shareholders are certainly hoping that will be the case this year, as the shares are sitting on a painful 27% year-to-date loss, at $73.86. The stock has spent the last several months struggling at the $74-$75 region, but appears to have found a new foothold above the 80-day moving average, which contained RCL's rallies in August.

On the sentiment front, traders and analysts can't seem to agree on Royal Caribbean Cruises Ltd (NYSE:RCL). Of 10 brokerage firms providing coverage, eight call the stock a "strong buy," with no "sell" ratings on the books. But short interest ticked higher during the most recent reporting period and now accounts for roughly 8% of RCL's total float, or more than a week's worth of pent-up buying demand, at the equity's average daily volumes.

Before traders get too excited, however, it's worth noting that the best fourth-quarter performers over the past 10 years have not necessarily done so well during election years. In fact, overall returns for the quarter have historically been muted during these years. Below, White has compiled a table of the 25 stocks with the best fourth-quarter returns during election years, going back 10 election cycles.

Interestingly, not one of our fourth-quarter outperformers above appear on the list. Two travel stocks that have outperformed during the fourth quarter in elections, however, are Carnival Corp (NYSE:CCL) and Southwest Airlines Co (NYSE:LUV).

Best fourth quarter election year stocks

RCL competitor CCL has given a positive fourth-quarter return in six of the past seven election years, yielding an average gain of 7.8% during these periods. The stock has given back 11.5% so far in 2016, at $48.23. The shares have been rallying this month, however, and are on pace to close above their 40-week moving average for the first time since mid-April. That hasn’t stopped options traders from taking a put-heavy approach. Carnival Corp's (NYSE:CCL) Schaeffer's put/call open interest ratio (SOIR) of 1.67 sits 9 percentage points from an annual peak.

And discount airline LUV has managed a positive fourth-quarter return in eight of the last 10 election years, with an average gain of 14.7%. But the stock has been facing technical troubles lately, being rejected by the $38.50-$39 region twice already this month, and running into resistance at its declining 80-day moving average today at $38.47. Meanwhile, only 2% of the stock's available float is sold short, suggesting an influx of short sellers could weigh on Southwest Airlines Co (NYSE:LUV) going forward.

For traders targeting more short-term returns, check out our study on 25 stocks that could soar in the month of October. And don't miss this list of stocks set for an October slide.

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