Why you should sell travel stocks now
By
MoneyWeek Editor
John Stepek Aug 14, 2008
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Inflation’s soaring, the pound’s collapsing, and the Bank of England reckons we could be heading for recession. But one man still has a smile on his face.
Manny Fontenla-Novoa, chief executive of travel operator Thomas Cook, reckons he’s seen no evidence of consumers cutting back or trading down on their annual holidays. In fact, he’s even planning to stick prices up by 8% next year.
In this morning’s Telegraph, Richard Fletcher muses that while consumers are willing to put off replacing their sofa or their car, “the holiday… is sacrosanct, or so it seems. Even in a downturn, there are winners and losers.”
There sure are. But holiday companies won’t be among them. Here’s why…
The boom’s over. Most people probably accepted that around about the end of last year, as it became obvious that house prices weren’t rising anymore. And as the year has worn on, they’ve also accepted that the wider economy is in trouble. House prices are tanking. Credit is getting harder to come by. Energy bills are shooting up – and it looks like their monthly payments may well jump too when they have to remortgage.
All of that is enough to make people feel that bit poorer. And what’s the first thing you cut back on when you feel poorer? Impulse buying. Think about it. If you take a stroll down the High Street on a Saturday morning, with money in your wallet, safe in the knowledge that your house price rose by another £1,000 last month, then you’re very open to temptation. New pair of jeans? It’s only £40. New flat-screen telly? Stick it on the house.
But this isn’t how most people feel anymore. Now the average consumer walking down that same street, is feeling slightly shell-shocked by the whopping great gas bill that came through the door that morning. At the back of his mind is the horrible suspicion that his house might be worth less than he paid for it. New pair of jeans? That £40 will barely cover the gas for the past week, let alone the past month, he thinks. New flat-screen telly? Forget about it.
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Consumers aren’t cutting back on holidays yet – but they will
Yet despite all this, things just aren’t that bad yet. Unemployment might be rising, but he still has a job, and can’t see that changing. Repossessions might be rising, but he still has a home, and that won’t change either, surely. None of his friends have lost their jobs either. Life is getting more expensive, certainly, but the really, really bad things are still only happening to people out there in newspaper and TV land.
So snap purchases are a thing of the past – which is terrible news for retailers in general. And needless (and rather dull) purchases like a replacement sofa, or a replacement car, can be put off.
But the annual holiday is much less vulnerable. Things would have to be really bad to justify cancelling the two weeks in the sun that make the rest of the working year bearable, our man thinks.
And that’s why Thomas Cook hasn’t taken a big hit to sales yet. As Mr Fontenla-Novoa says, “the last thing [people] cut back on is their holiday.”
But cut back they will. Unemployment is rising steadily – the rate ticked up to 5.4% in July. And as soon as the average consumer starts to see job losses happening within their circle, their attitude will change from “it’s not that bad” to “can we really afford to go away this year?”
So Thomas Cook is quite right to raise prices now. Quite apart from soaring fuel costs and the weak pound, travel groups need to take advantage of the fact that people still think they can’t do without their annual break. That won’t be the case this time next year. If you still hold any travel stocks, I’d suggest you sell them now.
As for what you should be buying – for the moment, I favour defensive stocks, the pharmaceutical sector in particular (see our recent cover story, Big pharma: cure for a downturn? for more). But if you are after something a bit more exciting – and arguably, with a lot more profit potential - you should keep an eye out for an email we’ll be sending you later on MoneyWeek tipster Paul Hill’s investment service, Precision Guided Investments.
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