How To Play Travel During COVID

16 nov 2020

One of my favorite names in the entirety of the U.S. stock market is BKNG, a massive travel conglomerate that earns revenues from referral commissions on car rentals, restaurant reservations, accommodations, flights, and travel packages. It's an incredibly high margin business growing at a quick clip with few competitors, but often ignored due to its high absolute stock price, which prevents much retail interest. Obviously COVID has decimated it's business, but I still like the idea of being long the company. This is especially true now that PFE has presented highly positive vaccine data, which could mean that we are all much closer now to a world that is open to travel and thus surging revenues for the company. BKNG is such a good company that even in an apocalypse scenario for travel they are on track to make a positive net income for the year. How's that for operating efficiency?? I feel the same way about TCOM, a company similar to BKNG that has a high level of exposure to the Chinese consumer - a customer group that's going to be emerging from this lockdown likely more quickly than the rest of the world.

The problem is that these companies have already gapped up on this good news, so finding an acceptable entry point doesn't seem likely in the short run.

Here's the solution - short EXPE against going long in TCOM and BKNG to offset the 'beta' or 'valuation premium' exposure. EXPE is on much weaker financial footing, so the vaccine news was even 'relatively' better for them, but this gap may prove to be a buy point for this pair trade as it's likely that in the long term EXPE is likely to underperform its larger and more efficient competitors, TCOM and BKNG.

I'm looking for any signs of strength in this pair, and then I'm going to be buying with an initial target of 21 - a 25% return. Welcome back to the world of relative value trading!