‘Stock’ing up for recovery (part one)

Speculative opportunities abound in the travel and hospitality industries. Portfolio manager Margaret Samuel picks four stocks for brave-heart believers. Here are two of them.


Do you have the courage to travel yet? Or maybe just speculate on some travel stocks instead.

Investors want to know when the bottom of stock prices in the travel industry will occur so they can start nibbling. In this article, we look at some travel stocks with prices that are near bottoms of their trading ranges. Although there is some risk that some or all of these may not recover, we believe the ones we present here have strong enough balance sheets or financial resources to withstand this current downturn and that they can be purchased and held for speculation rather than investing.

Carnival Corporation & PLC (NYSE—CCL)

In its heyday, as one of the biggest cruise lines on the planet, consumer stock Carnival was valued at $40 billion and operated about 100 ships. In the face of the global impact of COVID-19, Carnival paused its guest-cruise operations in mid-March, 2020 and has accelerated its fleet optimization with the sale of less efficient ships to result in a larger average berth size, a lower average age, enhanced operating-expense efficiencies and reduced fuel consumption.

COVID-19 has had, and is expected to continue to have, a significant impact on Carnival’s financial condition and operations. The longer the partial pause in guest operations continues, the greater the impact on Carnival’s liquidity and financial position. Carnival is unable to definitively predict the timing of its complete return to service and is currently unable to provide an earnings forecast, but expects a net loss on both a US GAAP and adjusted basis for the quarter and year ending November 30, 2020. It lost $10.2 billion in 2020.

Carnival resumed limited guest operations in September 2020, with adjusted passenger capacity and enhanced health protocols developed with government and health authorities, and guidance from Carnival’s roster of medical and scientific experts.

Carnival continues to take bookings for both 2021 and 2022 and cumulative advanced bookings for the second half of 2021 capacity currently available for sale are at the higher end of the historical range. Carnival believes this demonstrates the long-term potential demand for cruising.

With the depth of its balance sheet and funding alternatives, Carnival is preserving cash and securing additional financing to increase its liquidity. Since March 2020, it has raised $12.5 billion through a series of financing transactions including drawing down its $3.0 billion Revolving Facility in March 2020, issuance of common stock, private placements of convertible and secured notes, and extension of debt maturities. Creditors have also agreed to provide debt holidays and to waive financial covenants, and Carnival has also suspended dividends on and repurchases of common stock.

With a total of $8.2 billion of cash and cash equivalents at August 31, 2020, and with an expected monthly average cash burn rate for the second half of 2020 of $650 million, Carnival has enough cash to survive two to four years at the current level of business reduction and continues to explore opportunities to further reduce its monthly cash burn rate.

As we all expect travel, including cruising, to recover to normal levels at some time, it is likely that there will be a bottom that will, with 20-20 hindsight, prove to be a table-pounding buying opportunity. In attempting to find the low, investors should keep in mind that many of the steps Carnival has taken to preserve liquidity and financial survival, including the issuance of common stock and suspension of dividends, dilute common shareholders’ value. An investor with excess funds may be willing to purchase this stock as a speculative—rather than investment—opportunity at this time.

Ashford Hospitality Trust, Inc. (NYSE—AHT)

Ashford is a real estate investment trust, or REIT, that focuses primarily on upscale, full-service hotels and resorts from Florida to Alaska. Ashford Hospitality Trust is based in Dallas, Texas and went public in 2003. Previously, its predecessor companies had a long history in the hotel business going back to the 1960s. Ashford Hospitality Trust benefits from experience gained through hotel cycles, disciplined capital market activities, a successful transaction track record and value-added asset management. A few of the nameplates on its 100-some properties include Ritz-Carlton, Crowne Plaza and Embassy Suites. Catering to well-off clientele means better margins and better reliability, since visitors with deep pockets will keep shelling out the cash even in a modest downturn for the broader economy. In normal times, this helps support reliable revenue, and a reliable dividend.

However, COVID-19 has decimated the hotel industry. Demand evaporated following government shutdowns and there has been an unprecedented decline in revenue. Short-term hotel leases mean revenue can disappear overnight, but fixed operating costs remain, and even variable operating costs take time to adjust. Ashford’s market capitalization as of January 5, 2021 is $128.23 million USD. Ashford asserts that leading forecasters agree that full recovery will take four or more years.

However, Ashford moved quickly in response to COVID-19: it aggressively cut costs and secured revenue and its assets are positioned to potentially generate operating cash-flow. In September 2020 Ashford recognized that it needed to address liquidity. It has taken steps and benefits from government programs to protect common shareholders. In September 2020 Ashford announced it was seeking to recapitalize by exchanging preferred shares for common shares, and on November 25, 2020 announced that recapitalization was successful. Ashford has also suspended its stock dividends into 2021 in light of the ongoing uncertainty from the COVID-19 pandemic and the board of directors will continue to monitor the situation and assess future quarterly dividend declarations.

The government is supporting Ashford’s industry. On December 21, 2020 it was reported that leaders of the hospitality industry have praised the new $900 billion stimulus package agreed to by House and Senate leaders.

Also, importantly, Ashford has announced an agreement for a capital infusion of $200 million by Oaktree Capital, and at a cash-burn rate of $17 million per month, this should last for a further year. In addition, the financing commitment can be up-sized by $150 million to an aggregate amount of $350 million. “We’re encouraged by the news regarding vaccines and believe this strategic financing commitment provides substantial capital and ample liquidity for Ashford Trust to capitalize on the upcoming recovery in the hospitality industry,” commented J. Robison Hays, Ashford Trust’s President and Chief Executive Officer.

“We’ve had great success in our forbearance efforts and we continue to take aggressive measures to optimize our properties as well as enhance our operational and financial flexibility.” Mr. Hays added, “Oaktree is a best-in-class institutional partner and we welcome the opportunity to work with them on our shared vision for the Company. We believe that our portfolio is not only well-positioned as we come out of this pandemic, but Ashford Trust now has a sound balance sheet and sufficient capital resources to successfully navigate the pandemic and pursue long-term growth.”

Investors considering purchasing this stock or holding it should follow updates closely in considering what actions, if any, to take with respect to Ashford Trust.

Margaret Samuel, MBA, LL.B., CFA is President, CEO and Portfolio Manager of Enriched Investing Incorporated. She can be contacted at info@enrichedinvesting.com.

This is an edited version of an article that was originally published for subscribers in the January 2021, Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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