3 Cheap Stocks to Buy and Hold This Summer

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Every Monday morning, I sit down with Morningstar Research Services’ Chief U.S. Market Strategist, Dave Sekera, to discuss one thing that’s on his radar this week, one new piece of Morningstar research, and a few stock picks or pans for the week ahead. But with travel season in full swing, Dave and I are doing something a little different in this week’s show. We’re going to focus on the travel subsector. And then Dave is going to be talking with two of Morningstar’s analysts about three cheap travel stocks they like today.

Dave, good to see you today.

David Sekera: Good to see you, Susan.

Dziubinski: Dave, we’ve talked in the past on the show about the shift in consumer behavior back to services and away from goods postpandemic. What’s that meant for the travel in general, starting with leisure travel?

Sekera: Sure. And we are definitely seeing that still continuing to play out. Now, in the travel services area, leisure travel had really been the first area to really rebound. And in fact, at this point, we’re actually seeing probably even more travelers now on the leisure side than what we even saw prepandemic. So, at this point, while that’s still playing out, the other areas that are recuperating that we’re also focused on is going to be the international travel and the business travel areas.

Dziubinski: Let’s talk a little bit specifically about business travel.

Sekera: With business travel, right now, we think it’s probably around 80% to 85% of where it was prepandemic. Now, we do expect that that over time will continue to keep recuperating and rebuilding and get back to prepandemic levels. However, that still may take a little bit more time. The two things that we see going on there here in the short term with a little bit of economic softness, companies are definitely trying to keep costs down here in the short term. So, I think they’re trying to keep some of that from coming back as soon as I think a lot of salespeople would like to get back on the road. But also, we are definitely seeing a lot of economic softness overall pressuring that sector.

Dziubinski: Got it. And then, how are things looking on the international travel front?

Sekera: International travel, it really depends on which area specifically we’re looking at. So, between the U.S. and Europe, that’s really much fully recovered according to our numbers. And in fact, leisure travel might even be a little bit higher now than it was prepandemic. So, the area that we’re really focused on there is going to be the travel between Asia and the rest of the world. Again, we still see a lot of restrictions in China from the pandemic are still being reduced at this point. So, we are looking for a lot more international travel and even specifically group travel going forward.

Dziubinski: Got it. Let’s talk a little bit about some of Morningstar’s insights into three industries within that travel services subsector. Let’s start with hotels. What do we think there?

Sekera: The hotels sector was probably one of the first ones to recuperate. And again, I think it was the leisure travel that really supported the hotel area. Going forward, some of the picks that we have are really going to be focused on those hotel chains. They’re going to benefit either from specific idiosyncratic characteristics that they have or some of the other ones, like Park Hotels that we’ve talked about in the past, which should benefit from the return of the international traveler and that group travel.

Dziubinski: Got it. Let’s talk a little bit about travel technology. What’s going on in that space?

Sekera: There’s two things in travel technology going on. In the short term, travel technology has done extremely well just because there’s been such a high number of bookings from the leisure travel, the recuperating that we’ve been seeing of the business travel, as well as the international travel. That’s got a good tailwind there. But even longer term, we still think that there is a good tailwind behind the sector. And just thinking through with that sector, there is still this ongoing long-term secular trend of people moving and shifting their behavior toward online and booking online for their future travel needs.

Dziubinski: Got it. And then, lastly, Dave, what about cruise lines? Are they back to smooth sailing?

Sekera: Well, we’re getting there. With the cruise lines, of course, no sector was hit as hard as the cruise lines during the pandemic. And that’s definitely been coming back. It’s kind of funny. The people that like to cruise really like cruising. And I think we’re seeing a lot of that coming back. We’ve seen the return of the traveler there. And some of the specifics that we’ve been looking at is, one, they’ve been getting very good pricing on their future bookings. And we’ve also been seeing a lot of people put more deposits down on those future travel bookings. In fact, the amount of deposits that we see out there now across the sector is actually even higher than what we had seen prepandemic. And I think that really just goes to show the level of commitment that people have for cruising.

Dziubinski: Now, for the picks portion of this week’s program, Dave recently talked with two of Morningstar’s analysts about three of their favorite stocks in the hotels, travel technology, and cruise line industries. Here’s what they had to say.

Sekera: Joining me is Dan Wasiolek, senior equity analyst on our Consumer Equity Research Analyst team. Now, Dan, hotel stocks have generally done very well already thus far this year. Do you still see any that are undervalued today?

Dan Wasiolek: Hotel stocks have done well this year, and we think that’s due to the human ingrained desire to travel, as well as remote work flexibility. What we would also point to is that within the U.S. and Europe, hotel demand has exceeded 2019 levels for over the past year. Now despite this strong performance within hotels, we still do see opportunity for investors. One name that we would highlight would be Wyndham Hotels, ticker WH. It’s a narrow-moat stock, Medium uncertainty, that is trading in 4-star territory and at a 20% discount to our $89 fair value estimate.

Sekera: And on Wyndham, could you just briefly walk us through a synopsis of your investment thesis on that company and maybe highlight some of the underlying assumptions that you think are most important?

Wasiolek: To begin with, Wyndham’s narrow moat is driven by a brand intangible asset advantage. A lot of our investors and viewers might be familiar with some of their brands, such as Days Inn and Ramada. Maybe what a lot of investors aren’t aware of, though, is that Wyndham’s portfolio—a lot of it is exposed to off the interstate. And so, that’s hugely important in the next several years as the U.S. invests to upgrade and improve roads and bridges and those workers need to stay at hotels along those interstates. In fact, today, about 20% of Wyndham’s room nights already are used for these infrastructure workers, and we think that’s going to be a driver in the next several years. And as a result, we think revenue growth can average a high-single-digit percentage rate and that earnings can average in the low-double-digit percentage rate for the next few years. So, this is a name that trades currently at 12 times EV/EBITDA. We think that it should trade closer to the 14 times multiple that some of its peers trade at.

Sekera: Well, that’s interesting. Thank you. It’s an interesting way to be able to play two different aspects, both travel as well as the addition that we see in the infrastructure going forward. Now, I want to change gears here just a little bit and talk a little bit about the technology sector. Of course, technology has been on a huge rally thus far this year. In fact, we think the sector overall is getting to be overvalued at this point. Now, I’m curious, from your perspective, within the technology sector itself, do you see any specific areas that serve the travel industry that are still undervalued today?

Wasiolek: Within travel and the technology bent, you have the online travel agency platforms. So, those would be Booking Holdings, Airbnb, and Expedia—that have narrow moat, High uncertainty type ratings. The one name that we would point investors toward right now would be Expedia, and that ticker is EXPE. And that currently trades at a 40% discount, or about a 40% discount, to our $175 fair value, and it trades in 4-star territory.

Sekera: Could you also walk us through your investment thesis there and some of the underlying assumptions?

Wasiolek: This narrow moat is driven by a network advantage. Expedia has pretty much just about any travel type supply that anyone could be looking for on this platform. And because it has a plethora of this supply, it generates a lot of user activity. And that’s really the source of that network advantage. Now, Expedia the last couple of years has been investing to improve their technology, their loyalty, and the utilization of their data capabilities. And we think that, because it’s been focused on that, its recovery rate, which has been strong, it hasn’t been as strong as Booking, but we think that’s a timing aspect. And because of these investments, we think they’re going to start to harvest those moving forward. And as a result, here, what we see the next couple of years on average is sales growth that is again going to be in the high-single-digit percentage rate with low-double-digit earnings growth over that time frame. And what’s really interesting here is that when you look at the valuation, one of the metrics that’s used typically in the industry, it trades at 7 times EV/EBITDA, forward EV/EBITDA. We think that it’s going to get back over the next year or two toward where it traded prepandemic, which was 10 to 11 times, as it starts to harvest these investments they have made and as that shows up in the financial results.

Sekera: This actually could be an interesting way for investors to play two themes here. One, the long-term secular growth in travel that we see, as well as be able to play the rally that we’re seeing in the technology market today. Thank you very much, Dan. I certainly appreciate both your time and your insights here.

Wasiolek: Thank you.

Sekera: Now, let’s switch to another area within the travel services industry. Joining me now is Jaime Katz, who is also a senior equity analyst on our Consumer Equity Research team. Thank you for joining me, Jaime. Now, I’ve taken a look, and it looks like all of the cruise line stocks are undervalued today. Out of those, which one would be your top pick?

Jaime Katz: I think, as of today, our top pick would probably be Carnival CCL. It’s a no-moat company. It’s trading at more than a 20% discount to our $22 fair value estimate. And that’s despite the fact that it’s doubled year-to-date plus. So, we do still think there is some more upside in those shares, and that’s even with considering our High uncertainty rating.

Sekera: And on Carnival, could you just quickly walk us through: What is your investment thesis, and looking forward, what are some of the more important assumptions in your financial model?

Katz: I think from a near-term perspective, what supports our thesis is we are looking at data that really has supported that the brand is resonating with consumers still. So, pricing levels are really strong. They are encroaching on 2019 levels. I think we’re going to surpass 2019 levels on an as-reported basis next year. And that gives us some confidence that this business is on a trajectory to some sort of normalized earnings level. From a macro perspective, when we look at this business, consumers are really exhibiting that they continue to prefer experiences over things. And we see that in the personal income and outlays numbers. So, the spending on services is still growing much faster than the spending on goods. And then, when we parse that out and peel back the layers on a more firm-specific basis, we think Carnival is in this really unique position because it does have very measured capacity growth. So, spending on new hardware will be rather limited over the next few years. They are working very hard to control costs. They’ve divested a number of underperforming assets. And I think that helps us have confidence that this company can really get back to mid-single-digit top-line growth. And then, as they continue to pay down debt, that flows through to benefit net income, and that gives them the opportunity to have a midteens earnings per share growth rate for the business over the next decade or so.

Sekera: Great. So, an interesting way of both playing the larger secular theme of people’s spending shifting back into services and away from goods, as well as people returning specifically to travel and the cruise lines in particular. Thank you very much, Jaime. I really appreciate your time, and I certainly appreciate your insights today.

Katz: Thanks.

Dziubinski: Thanks, Dave. Viewers, we’d like to hear from you. What stocks would you like Dave to talk about with Morningstar’s analysts? Drop your requests in the comments section below, and be sure to join Dave and I live on YouTube every Monday morning at 9 a.m. Eastern, 8 a.m. Central. And while you’re at it, subscribe to Morningstar’s channel. Have a great week.