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I hope this is the last time I write about reopening stocks. Maybe this time will different. The U.K. has boldly removed their restrictions, allowing Britons to go maskless in order to live with Covid. Here, Quebec and Ontario are peeling back stringent lockdown measures. In the States, companies will finally deploy their workers back to offices, following Omicron’s untimely delay. Omicron cases themselves are sliding almost as quickly as they soared. While we’ve done this dance before, it’s worth considering some reopening stocks across a number of industries.
Restaurant Brands International (QSR-T)
Headwinds are rising wages (across all service busineses, not just QSR) and rising supply costs. For example, the price of milk just jumped in Canada. My colleagues at Stockchase note QSR’s high debt, but these are manageable, and I agree. QSR stocks have slumped since Labour Day, after sailing at highs ($87.32) that approached pre-pandemic levels in the spring and summer during 2021’s reopening.
Tailwinds: Logic suggests that another reopening will drive sales higher, that workers finally returning to offices will revive line-ups for double-doubles at Timmy’s across the land, and that consumers of all ages will crave the fast food of Burger King and Popeye’s at lunch or leisure. In fact, food inflation could make cheap fast food more attractive than higher-scale restuarants.
Lockdowns and downgrades have pushed QSR shares down to attractive PE levels, currently 23x compared to 33x at the end of 2020 and 27.78x at the end of last September. QSR stock currently trades hands at $71, which is below both its 50- and 200-day moving averages. Meanwhile, QSR pays a 3.79% dividend, though based on a high 87% payout ratio. That’s a little concerning, but not a red flag.
QSR stock has been beaten down, but beaten to a point where shares look attractive in the face of macro tailwinds that play into its favour. Shares could move sideways until this brutal winter finally ends, but expect upside by the spring.
Chorus Aviation Inc (CHR-T) (Past Pick on May 31, 2021, down 22.6%)
It’s been tough finding a travel stock to buy now, since they’ve all moved up already, from Expedia to United Airlines. However, Chrous Aviation seized investor attention when it addressed rumours at the end of January that it could be buying a European aircraft lessor. Chorus refused to deny nor confirm speculation, but that hasn’t stopped investors from pushing shares up from $3.76 on Feb. 3 to $4.06 by lunch time on Feb. 7. Once known as Jazz Air Income Fund, Chorus flies regional routes across Canada for Air Canada, and leases planes to third-party air operators. Of course, during the pandemic both businesses were hammered and CHR has struggled like all plane companies. Of its last four quarters, the stock has beaten expectations only once, met them once, and missed twice.
I recommended CHR last May on the assumption that flights would resume. Unfortunately, they didn’t. This time around, I’m endorsing CHR on the same assumption, but based on the following facts as a reopening stock. Since last May, Canada’s full vaccination rate has leapt to 80%, surpassing the U.S. at 64.4%, while children under 12 are rapidly getting jabbed. Further, Omicron swept across the world’s populations, but like a big wave it crested suddenly and is receeding quickly. Third: the past two years have shown that Covid doesn’t like warm weather. Four: past spikes in travel prove that “revenge travel” is a real economic force. People are dying to travel, though it’s up in the air when business travel will recover. Five: Scotia Capital just upgraded CHR stock, citing a possible rebound in the aircraft leasing market and the company’s plan to invest $330-400 million on planes this year, based on liquidity of $434 million. Watch for CHR’s full-year report on Feb. 17.
If this British deal indeed happens, then add that as a sixth reason to buy Chorus, but without it, you’re still looking at upside later this year. The street projects CHR shares will swing 39% higher to $5.46. The dividend remains on ice. Cautious investors may want to take a partial position now and see how things play out. (Disclosure: I own shares of Chorus Aviation.)
Take-Two Interactive Softwar (TTWO-Q) (Past Pick on Aug. 18, 2021, up 8%)
TTWO could be a lockdown or reopening play. Like liquor and gambling, people love their videogames, games that can be played anywhere these days, even while travelling. The market forgot about the videogame business until Microsoft bought troubled Activision Blizzard last month in a Blockbosuter deal. Though this purchase is pending approval from Washington, gaming stocks have already benfitted. Since Jan. 18 (to Feb. 7), TTWO shares have popped nearly 15%. Unfortunately, that has pushed the PE higher to 33.6x from 27.41x last September, though still far below 2020-21 levels of 40-50x. Also, the street places a forward PE of 50.68x, seeing strong growth prospects.
TTWO stock has risen above their 50- and 200-day moving averages. Momentum is strong. Shares soared last fall before turning bumpy this winter until the Microsoft news. TTWO stock has beaten its last four quarters. Its most recent EPS of $4.84 is up 17.06% in the past year. Gross and profit margins (66.04% and 16.72%) score higher than the industry norm, though ROE of 17.69% is lower than average in the recreational products space. Altogether, the street sees more than 15% upside to $201.93, based on 11 buys and three holds. Game on.
