Why it may take the travel industry a few years to get back to normal

Sam Hendel, Levin Easterly Partners President, joined The Final Round to discuss his outlook for the market, why travel stocks may take some time to bounce back, and the stocks he's watching.

Video Transcript

MYLES UDLAND: We're joined now by Sam Hendel. He's the president of Levin Easterly Partners. And, Sam, I want to start the conversation by kind of talking about where the market is at because, you know, in, like, thinking about will the markets come back? you think they already have. And I think with the S&P above 3,000, that's a pretty uncontroversial take at this point.

I guess the question now in your mind is what's the incremental driver of where stocks go, up or down, in the future? Is it really just news about a vaccine, the progress of the virus, or is the economic data going to weigh more heavily, whether on the up- or the downside, to the markets in the months ahead?

SAM HENDEL: Well, I certainly think that the market's ahead of the-- ahead of the actual economy. I mean, we're going to see very difficult numbers coming out. I'm hopeful that April was the bottom, and you're starting to see reopenings around the country-- you know, hopefully fairly slowly in a measured way. But the world is getting a little better, and what we're hearing from CEOs is that they are starting to see a pickup in the US. Europe's still lagging behind a little bit. And Asia, and China in particular, is actually fairly strong. It's coming back at a reasonably good clip.

So, you know, I'm pretty cautious about the market here. I think it's discounting a lot of-- you know, one thing the market's doing though, it's-- you know, a lot of the money is going into the largest companies, especially the big four or five tech companies, in the assumption that the strong will survive and that the bigger companies are going to keep getting more market share away from mom-and-pop small businesses and also away from the smaller-cap names. And I think that's why small cap has lagged this year in comparison to large cap.

So overall, you know, I think the market's maybe a little ahead of itself. But, you know, I am hopeful that we're starting to see a turn of the economy.

MYLES UDLAND: Well, and then Sam, I guess kind of related to that question, what have you been doing in the last month or so? I think it's been about a month, six weeks since we last talked. I mean, what have you felt compelled to do in this environment, or are you kind of seeing things maybe run away from where you thought they were more attractive given what we've seen?

SAM HENDEL: Well, the good thing for us is that we're playing in the value sector, and the value names continue to be very cheap. And so a lot of the-- really from 2007, you know, and continuing until now, growth has outperformed value, and we're still at the widest that we've ever been in terms of multiples of growth stocks versus value, even higher than that multiple differential during the dot-com bubble.

So in our area that we're playing in, which is buying, you know, cheap stocks that are down in price and out of favor that have catalysts to unlock them, we're still finding a lot of great ideas and a lot of things to do, and we're pretty excited about what's in the portfolio.

DAN ROBERTS: Sam, Dan Roberts here. One topic that we have found so interesting amid the quarantine is the stay-at-home trade, as we've called them. And obviously it's a diverse group, and then, of course, lately lots of things are up. But there are some names that really were up for about two months on the thinking that this time is benefiting them. There was Clorox, Walmart and Amazon and Target obviously due to e-commerce, Peloton, of course Zoom. And then Zoom had a little step back because of the security concerns, and then it was fine again.

But some of those names now have really lost steam. And, of course, some of the critics of Peloton thought there was maybe too much of a pull forward in demand. I thought that was silly. I mean, if people are buying bikes, it's great, buying the bikes.

But what do you make of that group of names, and how do you think they'll fare once this time in full quarantine is over as things start to reopen? Will we see some of those names really lose steam?

SAM HENDEL: Yeah, I think that, you know, it really-- it's really dependent on the names. Walmart's in our portfolio. We think Walmart's fantastic here. You are paying a higher multiple than you were before, but if you back out, you know, some of Walmart's spend that they're doing in India with Flipkart and also on their online strategy, then you're getting Walmart still at a very reasonable price, and they are taking share.

Some of the other companies you mentioned, I do think there's an element of, you know, timing the market. It's very challenging to-- you know, one, yes, there's a vaccine that's hopefully coming out at the end of this year or early next year, but we're not in the business of trying to time the market. We're just trying to buy-- you know, buy good-- buy good companies with good balance sheets that have the-- that really have the balance to hold firm during this time and some aspects that are defensive where the company's going to be OK during a difficult time and other-- you know, other aspects that are offensive-- you know, companies that are doing OK that when the world gets back to normal, they're going to have a lot of juice in them and do really well at the right time. But I think it's challenging to really get the timing right on a return to normalcy.

SEANA SMITH: Yeah, Sam, one thing in your note that stuck out to me, you talked about the fact that we are seeing the start of the recovery and it will be reasonably linear-- this is what you think-- in some sectors. But you also went on to say that it could take other sectors years to return to those 2019 levels. What are some of those trades that you expect to be left behind in this kind of environment?

SAM HENDEL: I think travel is going to take a few years to get back to normal. And it's not my own opinion. I'm hearing it from the CEOs that we're speaking to. That's one thing that, you know, in this time, it's actually been-- it's been great. We've had a very easy ability-- when stocks are down, companies want to talk to you, so we've had no problem getting company managements on the phone and having conversations with them.

And, you know, that's what I'm hearing from the travel and leisure-- the travel and leisure folks, the management teams, that it's going to be years to get it to getting back to normal. Something like, you know, going to a Disney theme park, getting on a cruise, traveling, it's going to take a bit of time.

I think there are other sectors that you're seeing a lot of extra demand, like consumer staples. We personally think consumer staples should have a higher multiple than they had before the crisis because those stocks had a lower multiple than some of the, you know, more attractive, faster-growing consumer-discretionary names. And I think that some of that spend on, you know, fancy luxury goods also might take a while to recover.

So we think that the basics that people are spending on are going to be OK here, and there are other pockets of the market that I do think are going to take quite a bit of time, that it's more of either a U-shaped recovery rather than V shaped, or even I've sort of been joking around about the Nike swoosh down and then a slow-- a slow move up to the right.

MYLES UDLAND: Sam, I like that that, that managements are easier to get on the phone when times are bad. I guess it's like therapy, both for them as managers and maybe you as a potential investor. Everybody feels a little bit better after having some human contact.

SAM HENDEL: Yeah, and it might be easier to speak to us when they have no idea what's happening with their business either. And this is period where, you know, most companies have now pulled their guidance, and that's fine. We're OK with companies pulling their guidance. If they can't forecast their business, it's understandable.

Our job is to figure out, you know, really, what's the earnings hit this year? Does the company have the liquidity to-- you know, to remain in business? And really, you know, people aren't looking at 2020 earnings anymore. We're already turning to '21 and even '22 in some cases because there is an aspect here where, you know, the value of a stock is the discounted-- the future discounted cash flows. And, you know, one year of cash flows, as long as the company stays in business, isn't as important as the totality of what the business looks like going forward.

MYLES UDLAND: All right, Sam Hendel is the president of Levin Easterly Partners. Thanks so much for joining us. We'll talk to you soon.

SAM HENDEL: Thank you, guys.