Pandemic Recovery: Have BEACH Stocks Bounced Back?
The travel and entertainment industries have had a volatile ride over the last year.
During the initial stages of the pandemic, when panic and uncertainty ran rife, BEACH stocks–booking, entertainment, airlines, cruises, and hotels—were left scrambling. Collectively, $332 billion in market cap washed away.
Now, it appears the tide might be turning for these companies, buoyed by vaccine breakthroughs and glimmers of hope for a return to normalcy.
This infographic looks at the growth in market cap value across BEACH stocks one year from when the WHO officially declared COVID-19 a pandemic.
Washing Back to Shore?
BEACH stocks have gained a collective $376 billion in market cap in the year since the pandemic was declared, with about half the companies trading at their respective all-time highs.
In fact, about 70% of BEACH stocks have actually outperformed the S&P 500, which returned 43.7% during the same period.
|Company||Ticker||Category||Market Cap: 03/11/20 ($B)||Market Cap: 03/11/21 ($B)||Change|
|Alaska Air Group||ALK||Airlines||5.7||8.1||42%|
|Delta Air Lines||DAL||Airlines||29.1||30.9||6%|
|Caesars Entertainment||CZR||Casino & Hotel||2.2||20.8||824%|
|Norwegian Cruise Lines||NCLH||Cruise & Casino||4.3||10.9||151%|
|Royal Caribbean Cruises||RCL||Cruise & Casino||10.8||22.4||108%|
|Carnival||CCL||Cruise & Casino||16.4||31.8||93%|
|Penn National Gaming||PENN||Entertainment & Live Events||2.6||20.4||661%|
|Six Flags||SIX||Entertainment & Live Events||1.7||4.1||142%|
|Live Nation||LYV||Entertainment & Live Events||10.8||19.3||79%|
|The Walt Disney Co||DIS||Entertainment & Live Events||201.2||357.1||77%|
|Cedar Fair||FUN||Entertainment & Live Events||1.8||2.8||57%|
|Choice Hotels International||CHH||Hotels||4.5||5.9||30%|
|Marriott Vacations Worldwide||VAC||Hotels & Resorts||3.8||7.7||103%|
|Vail Resorts||MTN||Hotels & Resorts||7.1||13.4||88%|
|Park Hotels & Resorts||PK||Hotels & Resorts||3.4||5.3||58%|
|Wyndham Hotels & Resorts||WH||Hotels & Resorts||4.2||6.4||51%|
|MGM Resorts International||MGM||Resorts & Casino||10.2||19.3||89%|
|Wynn Resorts||WYNN||Resorts & Casino||9.7||15.9||64%|
|Las Vegas Sands||LVS||Resorts & Casino||40.7||48.2||18%|
BEACH Stocks Leaders and Laggards
When dissecting this basket of stocks by industry, it’s clear that much of the recovery story is lopsided. One reason for this, despite the pandemic, is that there are more granular, idiosyncratic trends occurring within these sectors.
Let’s look at what’s propelling the leaders, and dragging down the laggards:
Leading: Online Betting
There’s reason to be bullish on gambling stocks. Since late 2018, some 20 states have legalized sports betting, with more expecting to follow. Relative to other areas, the pandemic has been kind to gambling stocks. Many of those with an online presence have witnessed a spike in traffic, as more people continue to flock towards online betting.
Within the BEACH stocks basket, Penn National Gaming and Caesars Entertainment are clear outliers, having grown an epic 661% and 823% respectively. In addition, the broader industry (measured by the BETZ ETF) has nearly doubled the performance of the S&P 500 since its inception.
The return to normalcy will be much more delayed for airlines. Global RPKs, an industry metric, are not expected to reach pre-pandemic levels until 2024.
Actions of insiders also seem to match this negative sentiment. Warren Buffett, once a staunch supporter of airlines, decided to call it quits during the pandemic—dumping his entire position.
U.S. airline executives have collectively been selling their stakes much more aggressively than in the last few years. To add insult to injury, there’s significant shorting of airline stocks as well. At a short interest of 11.6%, American Airlines is most heavily shorted BEACH stock.
In a year where social interactions and gatherings have largely disappeared, so too has much of the business activity for hotels. For instance, Hilton sales suffered a 58% decline year-over-year.
But even without the pandemic, the hotel industry had their work cut out for them, through a growing and formidable competitor in Airbnb. Airbnb can scale its network beyond what any hotel can. This is evident in its room count, which is greater than the largest hotels combined.
More Bumps On The Road Ahead?
The investing landscape today looks to be disconnected from reality, in part because of the forward-looking nature of markets. Even though things are dire today, there’s a belief that light exists at the end of the tunnel.
But the path to recovery isn’t quite so linear. When the dust settles, it’ll become more apparent which industries will “return to normal” and which have set out permanently on a new trajectory.
Recession Risk: Which Sectors are Least Vulnerable?
We show the sectors with the lowest exposure to recession risk—and the factors that drive their performance.
Recession Risk: Which Sectors are Least Vulnerable?
In the context of a potential recession, some sectors may be in better shape than others.
They share several fundamental qualities, including:
- Less cyclical exposure
- Lower rate sensitivity
- Higher cash levels
- Lower capital expenditures
With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.
Recession Risk, by Sector
As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:
|Sector||Margin (p.p. change)
|🏡 Household Equipment||-0.9|
|🚗 Automotive Manufacturers||-1.1|
|🏭 Machinery & Equipment||-1.1|
|🖥️ Computers & Telecom||-2.0|
*Percentage point changes 2021- 2022.
Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.
Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.
In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.
What to Watch: Corporate Margins in Perspective
One salient feature of the current market environment is that corporate profit margins have approached historic highs.
As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.
According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.
Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.
Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.
Sector Fundamentals Looking Ahead
How are corporate metrics looking in 2023?
In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.
Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.
For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.
|S&P 500 Sector||Percent of Companies With Revenues Above Estimates (Q1 2023)|
|Real Estate ||81%|
Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.
Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.
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