Reopening Stocks and Unbridled Optimism

Travelers are hitting the airports back near pre-pandemic levels this summer

Aug 21, 2020 at 2:31 PM
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Even the most ardent Anthony Bourdain-inspired traveler took a look around the world as the coronavirus grew into a pandemic and decided to pack it in. That has meant a miserable six-month stretch for travel stocks – airliners, cruise names, booking sites – none were exempt. The first mention of the coronavirus on came back on Jan. 21. Exactly one year to that day, let's check in with travel stocks and take the temperature of the investor sentiment toward the market.

The numbers for stocks impacted by lockdowns are about as ugly as you can imagine; as of Wednesday, Aug. 13, the Invesco Dynamic Leisure and Entertainment ETF (PEJ) is staring at a -30% year-to-date return, while the U.S. Global Jets ETF (JETS) has taken a 44.3% haircut in 2020. That's good for fourth-and second-worst on a list of 30 exchange-traded funds we track, respectively. However, the summer months have tested the patience of Americans so much so that many have reverted back to pre-pandemic sensibilities.

The much-lambasted Transportation Security Administration (TSA) updates its travel figures daily. On Sunday, Aug. 9, the agency experienced over 800,000 people at airport checkpoints, the first reading above 800,000 since March 17. Below are the figures plotted with the iShares Transportation Average ETF (IYT). The jury is out as to whether PEJ and JETS can join IYT in the continued uptrend, even as the pandemic rages on without a vaccine. But it's clear that with (mostly) stricter mask laws in place, travelers across the U.S. now appear ready to risk it, a welcoming sign for travel stocks

COTW August 14

While travelers throw caution to the wind and take to the skies, there's also the reopening of schools to contend with. What does this uncertainty mean for apparel stocks, which usually stand to see a boost from "back-to-school" shopping? Sector heavy-weights like Nike (NKE) will be fine regardless, with its industry-leading $162 billion market cap. But further down the list are a few other interesting names to keep an eye on; North Face parent VF Corp (VFC) is approaching the $25 billion market cap level. Further down, Levi Strauss (LEVI), Ralph Lauren (RL), and Under Armor (UAA) are all situated at or near the $5 billion market cap. These figures will be under close scrutiny should schools reopen and parents scramble for back-to-school deals. Or, if more stringent restrictions are put in place and children are stuck taking classes in front of a laptop, those market cap levels could emerge as an overhang.

There's a sharp skew between longer-term and shorter-term outlooks of apparel stocks. The majority boast monthly and quarterly figures firmly in the black. But going out to year-to-date or year-over-year figures, those same stocks are still swimming in red ink. What's more, most of these apparel stocks are heavily shorted and unloved by analysts. LEVI, RL, and UAA all have more than 10% of their total available float sold short, and only LEVI has a majority of analysts with "buy" or better ratings.

Is there a correlation between travelers returning to the airport and apparel companies hungrily eyeing schools reopening? It underscores investor sentiment that remains bullishly skewed. Among options traders, the 10-day average of equity-only buy-to-open put/call volume ratios {ISE, CBOE, PHLX} is at 0.35 only slightly higher than its July 17 all-time low of 0.33. So a call bias is clearly still prevalent – and has been so for about a month – with the low commissions wrought from the retail-trading crowd likely amplifying the flow.

All of this optimism should give a contrarian traders pause, especially when harkening back to the seasonal statistics referenced in this space earlier. Plus, there are three market-moving events set to occur within the next three-and-a-half months that could bring this sunny optimism screeching to a halt: stimulus package gridlock, a potential covid-19 vaccine, and the November presidential election. With that in mind, a shrewd trader can account all of this uncertainty with options. Using call options in lieu of buying stock outright allows one to put less dollars at risk relative to equities, while the leverage allows you to achieve the profits you are seeking. Or you could hedge a long position with puts, allowing macro events to unfold without putting your portfolio at a major risk.

COTW Aug 14

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, August 17.


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