Are you craving travel? Overseas? Interstate? Out of the city? Anywhere?
With more than half of Australia’s population in coronavirus lockdown, you’re likely not the only one missing a holiday to an exotic location.
So you’d reckon ASX travel shares would be a good bet, right? Surely when border closures lift, the pent-up demand will be a bonanza?
No, because Mr Market isn’t an idiot.
Mr Market is pretty smart most of the time
Forager Funds chief investment officer Steve Johnson likes to remind everyone of a character from Ben Graham’s classic book The Intelligent Investor.
Mr Market is an anthropomorphic metaphor for the share market.
“Some days Mr Market is depressed and wants to sell you his stocks at absurdly low prices,” Johnson wrote in Money Magazine.
“On other days he is wildly optimistic and wants to buy your shares for a fortune.”
But despite those occasional mood swings, he’s actually pretty smart most times.
“He might be capable of irrational behaviour. We have seen plenty of that over the past 18 months. But he’s not stupid,” said Johnson.
“In fact, most of the time, Mr Market is an incredibly prescient character.”
Mr Market already knows travel will recover
Why is Mr Market so smart? It’s because stock prices are formed as a result of “hundreds of thousands” of investors doing their own analysis with all the information available.
It’s the old efficient market hypothesis.
“There’s plenty of research, best summarised in James Surowiecki in his book The Wisdom of Crowds, showing that the crowd gets it right far more often than any individual expert,” Johnson said.
“As a general rule, you won’t make any money predicting things that Mr Market already knows. And a travel recovery is the perfect example.”
“Travel is going to recover, but the market prices of these companies already assume that this is the case,” said Johnson.
“The total market value of online travel agent Webjet, for example, is higher than it was prior to any mention of COVID-19. Flight Centre, too, is trading back near peak valuation levels.”
But here are 2 shares with structural advantages
However, Johnson reckons his funds have found 2 lesser-known travel shares that aren’t just relying on recovery in tourism to boost their fortunes.
“Successful investments… don’t just require an insight. They require an insight that is unique.”
Johnson’s team bought into Experience Co several years ago when it was experiencing financial difficulties.
“Previous management made a number of large investments in far north Queensland which predictably soured. The share price tumbled and we started buying some shares.”
But with new leadership at the helm, net debt has been slashed from $30 million to $2 million. This allowed the business to endure bushfires and COVID-19 without raising new cash.
“Experience Co is surviving off domestic tourism alone. And the share price, too, has recovered to the levels of early 2020,” said Johnson.
“But when international tourists return en masse, hopefully in 2023, it’s our belief that this lean, restructured business will be significantly more profitable than ever before.”
The thesis for Apollo is similar, he added.
“Mr Market is anticipating a recovery, but he’s underestimating the amount of structural change both companies have made to their businesses.”
With the market so inflated now compared to a year ago, it’s harder to find gems that Mr Market hasn’t woken up to.
“There are pockets of opportunities. Most of our Australian Fund portfolio consists of businesses that we think have made permanent structural improvements that have been masked by the impact of COVID. But most prices today reflect a fairly sensible view of the future,” Johnson said.
“He will get depressed again, but for now Mr Market should be getting the respect that he deserves.”