ASX set for bright start; Wall Street investors eye COVID-hit shares

Wall Street hit record highs on Friday (US time), with the S&P 500 rising 0.5 per cent, while the Dow gained 0.1 per cent and the Nasdaq added 0.5 per cent. The ASX is set for a bright start to the week, with futures pointing to a jump of 37 points, or 0.6 per cent, at the open.

The focus on travel and leisure companies comes as investors more broadly gauge the effectiveness of the US vaccination effort and the degree to which it will help the economy get back on track.

The White House announced February 2 that it will start shipping vaccines directly to retail pharmacies alongside regular shipments to states, increasing weekly supplies of shots to 11.5 million. Approximately 10.5 per cent of the US population through February 11 had received at least one of the two shots required for full vaccination, according to estimates by the Centres for Disease Control and Prevention.

Will Hilkert, portfolio manager of the Fidelity Select Leisure fund, said that earnings results over the next two quarters will serve as a gut check for investors who had bet on the leisure sector as a play on the economy reopening.

“Over the next six to nine months you’re going to get a chance to make sure that what you think the world is going to look like after the pandemic is being matched by company fundamentals,” he said.

Hilton Worldwide Holdings and Hyatt Hotels are expected to release their results on February 17, followed by Marriott, Norwegian Cruise Lines and TripAdvisor on February 18.

Trivison, of Gabelli Funds, said he will be keeping an eye on hotel bookings in the group meeting business, which he expects to offer clues on the scale of employee travel in the week ahead. Business travellers typically make up 25 per cent of a hotel chain’s customers, though that number may be higher in destinations such as Orlando and Las Vegas.

Historically high valuations in the hospitality sector may give some potential investors a pause before buying at current levels, said Daniel Kane, a portfolio manager at Artisan Partners who bought shares of Marriott while its stock was tumbling last March and April.

Most stocks in the hospitality sector are now trading based on estimates of their 2023 results, pushing their current valuations well above their long-term averages, said Robin Farley, an analyst at UBS.

Marriott, for example, trades at a trailing price to earnings multiple of 240.7, while Hilton is currently unprofitable but trades at 515.7 its current fiscal year’s full year earnings, according to Refinitiv data.

Cruise lines, meanwhile, are not expected to become widely profitable again until 2022, when most international travel restrictions should be eased. Norwegian, for instance, trades at 35.2 times its 2022 estimated earnings, while Royal Caribbean trades at 40.4 times its 2022 estimated earnings, according to Refinitiv. Marriott was trading at a trailing P/E of about 16 before widespread economic restrictions were put in place in March.

Chris Terry, a portfolio manager with Hodges Funds, has been paring back a position in Norwegian after shares of the company rallied following the vaccine approvals. He is now watching for the company to show incremental improvement in its upcoming earnings report to confirm that business is rebounding.

“Going back a year ago, quarterly earnings were basically irrelevant,” he said. “Now we want to see that there’s progress on the timetable to get revenues back to where they were in a meaningful way.”

Reuters