It's official. Yesterday's market action officially put the S&P 500 into correction mode. The index has dropped 11.7% over the past five days, as coronavirus semi-panic is setting in. That puts the S&P 500 back at levels last seen in early October, "wiping out" about five months of gains. The markets mood (IMHO) is being further fueled by a nasty political environment. Unfortunately, that's the world we live in.
Ever the bargain hunter, I am intrigued by what I am seeing in certain segments of the market, however not ready to pounce on anything. I still do believe that the panic is overblown, but that does not mean that it won't continue.
The travel industry is being decimated, take a look at the cruise lines. Over the past five trading days Royal Caribbean Cruises (RCL) is down 30%, followed by Norwegian (NCLH) (-28%) and Carnival (CCL) (-25%). Year-to date performance is even worse, with the three cruise lines down 42%, 41%, and 36%, respectively. The drubbing these names are taking is not surprising given the fear and panic, as well as association with the virus in the Diamond Princess incident. The question is what happens from here, and is the damage overblown?
RCL now trades at just 6.5x next year's consensus estimates. There may be a disruption in earnings to the extent that passengers cancel current cruise plans and perhaps shun signing up for cruises as long as there are virus-related fears. At this point, it would be naïve to believe that consensus 2021 earnings per share won't come down, but to what extent is the question. CCL is trading at about the same level (6.6x 2021 estimates), but now yields 6.3%, while NCL trades at 6.2x 2021 estimates.
Airlines are also feeling the heat, with American Airlines (AAL) , Spirit (SAVE) , off 28% over the past five trading sessions, followed by JetBlue (JBLU) (-22%), United (UAL) (-19%), Southwest (LUV) (-18%), and Delta (DAL) (-17%). I'd imagine that travel itself will be bit tougher until we know the true extent of the coronavirus reach and severity. The extent to which passengers will be scared away from air travel remains to be seen.
As a value investor, I am naturally blessed (or cursed) with a contrarian streak. It should come with little surprise that we actually booked an upcoming RCL cruise (for just a couple of months from now) just a couple of days ago. I still believe this will all blow over, but the panic itself is difficult to control in a social media driven world, with a big election on the horizon, and that will continue to exert a grip on investors and the markets.
