Why the market is responding favorably to airline stocks

Ann Berry, Wheelhouse Chief Investment Officer, joins Yahoo Finance to discuss the outlook on the overall market, the airlines industry, big tech, and the IPO market.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to continue the market chat now with Ann Berry, chief investment officer at Wheelhouse. Ann, I want to actually start with the airlines because, you know, a lot of the major carriers came out today and admitted, I think, what most of us already knew, which is that rising COVID cases has a lot of people now rethinking their travel plans. Why do you think the airlines are rallying to the upside today?

ANN BERRY: It's a little bit of a mystery, but I think perhaps what's happening here is that the market is responding positively to the admission of the facts. I think one of the things that has baffled the market so far is when companies have come out either with vague earnings guidance or with a lack of direct confrontation of the impact that Delta is having on their businesses. The fact the airlines have come out and said with specificity, here's what we're seeing with respect to bookings and cancellations, here's our plan of attack, I think that's when the market responds favorably.

ALEXIS CHRISTOFOROUS: So do you think that-- or would you be or are you a buyer of the major airlines right now?

ANN BERRY: I'm not a buyer right now. In full disclosure, I actually bought into the airlines early in the COVID crisis. And I think one of the things that remains to be seen is, over the much longer term, which of the airlines are going to be able to sustain their capital structures, what is the impact of business travel going to be on their highest margin revenue streams. And I think right at this moment, particularly with the rally today, there isn't enough evidence to support some of the valuation uplift that we've seen to be able to sustain itself, particularly if Delta continues to provide a lot of uncertainty.

ALEXIS CHRISTOFOROUS: So on the wider sort of, you know, reopening trade outside of airlines, of course, you've also got the cruise lines, the hotels, the restaurants, too, to a large degree. What do you do with that reopening trade right now? Do you look for an opportunity, a good time to sort of get out? Because today, looking at the way the airlines are rallying, some people might think it is a good time to let go of some of those holdings.

ANN BERRY: I think it probably is. And I think, with respect to the restaurant space, I'd really try to unpack which of those have got a differentiated digital model and which of those don't. So when I think, for example, about the risk that comes with vaccination card, vaccination certificate, testing requirements in certain states, or the reintroduction of mask mandates, I would look to something like-- Chipotle, for example, has demonstrated enormous ability to pivot and create a direct-to-consumer or online business.

So that's where I would look to put my capital instead. And when it comes to things like the cruises, I think that's a very difficult space to look at right now. It's so state-specific, and the international markets haven't opened back up yet. I'd probably stay away.

ALEXIS CHRISTOFOROUS: I want to move over to retail for a minute because part of this equation is consumer confidence. And as the Delta variant continues to spread, is that going to mean people will stay home more, not want to go out and shop? Will they do so online? Which we saw at the height of the pandemic, of course. What are you doing with retail stocks right now, and who do you like?

ANN BERRY: I think that we've already seen the acceleration of the take-up of e-commerce, so I think we are going to continue to see growth slow down. I don't think we're going to see some of the blockbuster news that we saw coming out towards the end of last year and the first part of this year when it comes to a lot of these retail stocks.

There are certain ones that I think have got very interesting value propositions, like Walmart, less because of the e-commerce push and more because that business is very cleverly pushing into content, using content to support customer engagement, shoppable streaming social, and also doing a huge amount with what was a very nascent advertising business at the end of 2019 and has been growing at over 90% so far. So I think something like a Walmart and others like it are using data, they're mining it, and they're turning it into a service platform for some of their brand partners. I think it's a very clever pivot.

ALEXIS CHRISTOFOROUS: All right, I want to move over to IPOs because this has been an incredible year for new shares coming to market. We've got some big ones in the offing. We're expecting to see Reddit and Discord come to the marketplace later this year. What are your thoughts on the overall IPO market? Where are you concentrating your resources right now?

ANN BERRY: Well, the IPO market is hot right now, I think, as we've seen it in a very long time. Discord and Reddit are two that are fascinating to me because these are huge social community-based platforms that are, at the moment, driving real consumer behavior. Reddit, whether it's in the meme stock space, to the opening part of your show, and GameStop. Discord, which has really shaken up the conversation around different kinds of messaging in the gaming space, and we saw that Microsoft made a run at buying that business earlier this year. What I'm looking at is how these markets raise capital privately.

Reddit, for example, only within the last couple of months raised at a $10 billion valuation in the private market, I understand their internal expectations of a $15 billion IPO valuation. And so what I'm looking at very closely is what is the gap between the private market valuations of these businesses and where they go out to market a very short while later. And that's, frankly, why I'd be cautious, but I'd be looking to unpack some of these interesting business models very closely.

ALEXIS CHRISTOFOROUS: All right, since we're just racing through these different sectors, want to get your thoughts on big tech before we let you go, and specifically I'm thinking Apple. The stock has been on fire ahead of next week's expected launch of its new iPhone. What do you do with the stock like Apple right now?

ANN BERRY: To me, Apple feels a little bit expensive. I think it's being clever moving into something like wearables. I think part of the reason we have seen so much capital flow into that name is it feels like a staple. It's still got some growth prospects. It's not going away. And I think at the moment, as there's been a flight to quality, Apple has been one of the real beneficiaries of that trend. As we tell investors, they're really looking-- looking for places to park their capital, which they think are de-risk relative to some other higher growth players they could get behind.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Ann Berry, Chief Investment Officer at Wheelhouse, thanks so much for being with us today.