Stocks up, Fed floats trial balloon, Kingfisher sales surge

Morning Note

Markets in Europe have opened broadly higher this morning as they recover some of the losses from the swathe of selling on Wednesday, whilst the Federal Reserve underscored it’s in no rush to tighten monetary policy, minutes from its April meeting showed. Focus remains on the broader pace of inflationary pressures and recovery in the US with the weekly unemployment claims data (f/c +453k) and the Philly Fed manufacturing index. Iron ore and other industrial commodities linked to steel making feel as China said it would step in to curb rampant prices, though copper is rallying this morning. Focus also remains on the volatile crypto space after a dramatic day.

Crypto prices collapsed, with Bitcoin tumbling 30% to $30k on the nose before staging a big rally off this level. Outages at the Coinbase and Binance exchange didn’t help, fuelling a sharp leg lower around midday to the lows at $30k, but chiefly this seems to have been a run on stops triggering margin calls in the wake of China’s regulatory crackdown, which followed a period of steady losses seemingly brought about by a toppy market chart pattern and Elon Musk somewhat walking back his prior enthusiasm for the crypto. Institutional options activity seems to have further accelerated some of the moves as strikes were hit. As of this morning, the rout had stabilised, with Bitcoin trading around 30% off yesterday’s low, above $40k. There will be a lot of stranded longs now selling into any kind of strength. Stocks exposed to crypto prices like MicroStrategy, Coinbase and Tesla, were caught up in the storm, though they too closed well above their low of the day as the market recovered some of the losses.

Michael Saylor of MicroStrategy said he’s not selling. “Entities I control have now acquired 111,000 #BTC and have not sold a single satoshi. #Bitcoin Forever,” he tweeted. I expect him to keep Martingaling until it all unravels. Tesla boss Elon Musk tweeted that the emoji for ‘diamond hands’, following up by saying ‘Credit to our Master of Coin’, aka the CFO, Zach Kirkhorn. (I now check Elon’s Twitter the way I used to check the Donald’s each morning). Cathie Wood stuck to her $500,000 ‘target’ for Bitcoin, and suggested there were multiple signs the market is in a capitulation phase, which is often a good time to buy. Har har, Cathie would say any time is a good time to buy if it’s what she is pumping. The Innovation ETF ended the day down by almost 2%, and is roughly 34% below its all-time high struck in Feb.

The Fed floated a trial balloon, as minutes from its April meeting indicated some policymakers are thinking about thinking about tapering asset purchases. “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said. This was the first pointer – the first signal. It was done on purpose. Members of the FOMC also stressed the importance of “clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases”. Tentative – the question remains: when does the Fed think it’s hit the landing area for the economy, and does inflation take off in the meantime? US 10-year yields looked to test the 1.70% level again, trading at 1.672% this morning. Gold remains held up by technical support at the 50% retracement around the $1,870 mark, though real rates moved slightly higher – taper talk could make life trickier for gold bulls in the near term. Meanwhile the ECB warned of financial stability risks stemming from rising levels of sovereign debt. Vice president de Guindos warned of a “legacy of higher debt and weaker balance sheets which … could prompt sharp market corrections and financial stress”.

Markets were in a broad risk-off mode yesterday. There is talk of greater correlation between crypto and risk assets these days – certainly when you see a big move in either direction they tend to follow each other. The FTSE 100 ended the day down more than 1% at 6,950. The rub for the FTSE 100, as we witnessed from yesterday’s concentrated selling in consumer cyclicals, miners and energy, is that whilst the reflationary environment and reflation trade may still broadly said to be ‘on’, the index is really quite exposed to emerging market growth – so rising cases across Asia – India, Taiwan, Vietnam, Japan and Thailand in particular – may pose a risk to the market’s ability to regain the kind of 7,700 handle we saw pre-pandemic. Whilst the situation in the UK, Europe and US is improved greatly, the risk to emerging markets from the pandemic remains. Stocks like oil majors, miners and big consumer goods companies rely a lot on emerging markets for growth. Materials continued to roll over yesterday but copper firmed this morning after hitting its weakest since May 6th, while WTI  oil is also firmer around $63.50 after hitting its weakest since Apr 26th. However iron ore amid concerns China will act to keep a lid on surging prices. Again I’d be encouraged by the flat rejection of anything sub-6,900.

Kingfisher trades at highs not seen since 2017 after raising guidance for the first half of the 2021/22 year. After a particularly strong first quarter, management now expect mid-to-high teens group like-for-like sales growth, having previously guided for growth of low double-digit growth. As a result they’ve hiked adjusted pre-tax profit guidance to between £580m and £600m. This comes after a stonking first quarter in which group  LFLs rose 23% from 2019 levels and were up 64% year-on-year. Stunning year-on-year stats can be misleading, but the performance against the 2019 comparison is noteworthy and shows how Kingfisher has not only put integration problems behind it but also managed to successfully adapt to the pandemic. Execution of the ecommerce strategy has been exceptional – online sales up 258% from two years a Of course, DIY has been a popular pandemic past time, but nonetheless, group growth is ahead of the market.

EasyJet shares fell as it reported a 90% drop in revenues and a headline loss of £701m for the six months to the end of March. Passenger numbers for the 6-month period decreased by 89.4% to 4.1 million. I’d like to know who these 4m people are and what they are doing.

Is now a good time to invest in travel stocks?

Investments

Travel stocks have taken a Covid-shaped battering over the past year, but things could be about to change. Is the time right to look at investing in travel shares again? 

Should you invest in travel stocks? 

Travel shares & lockdown 

We all know the score when it comes to lockdown and travel stocks. They plummeted at the height of the pandemic, but with sensational vaccine development, approval, and rollout, they have started to respond again. 

In our look at airline stocks, for example, we’ve seen Ryanair, IAG, and EasyJet shares make substantial gains across the second half of 2020 and into 2021. 

The UK recently announced it had roadmap to get the country out of lockdown. That also gave travel stocks a shot in the arm. Britain’s vaccination programme has been one of the best in the world, and, if all goes according to plan, all social restrictions could be lifted by the end of June. 

On that news, announced on Monday 22nd February, we saw some airline, travel agent, and hotel stocks jump: 

Airline shares roar on high optimism.

Here you can see how sensitive travel stocks are to a reopening timeline with the shares leaping in the early part of the London session immediately after Johnson unveiled the roadmap. It’s not just air carriers whose stock price has benefited. German travel group TUI saw stocks rise by over 7%, while IHG rose at a more subdued, but still positive, 3%. Even cruise liner Carnival, which operates in a sector that has been bludgeoned by the ongoing pandemic, saw a small stock price jump. 

What we don’t know at this stage is how international travel will be affected. Will countries be open to UK visitors that have been vaccinated? Will borders remain closed to all but essential travel while they sort their own vaccine regimes out? Time will tell. 

Other stocks have also increased in value across the year. Expedia, for example, has rallied more than 200% since its March lows. Airbnb, however, has had a bit of a wobble, as its latest earnings call, its first as a publicly traded company, failed to match expectations.  

Still a bit of a mixed outlook. But in the words of Boris Johnson, we’re looking at a crocus making its way through the winter frost. A thaw is on its way, which may lead to a real rally in travel stocks.  

Of course, this is the markets. Anything can happen – especially in the topsy-turvy, pandemic-ridden world we live in. Make sure you do your proper analysis when looking at travel stocks, and make sure you’re picking the right stocks for you. 

 Travel stocks to watch 

EasyJet 

EasyJet has so far regained 44% of its value since grounding most of its fleet and restricted flights thanks to the pandemic. What it does have going for it is very strong cash reserves, enough to keep going for a year and half under current lockdown restrictions, plus its balance sheet has been backed by a £.15bn government loan. 

While uncertainty still remains in the airline industry, EasyJet was one of the UK’s most popular pre-pandemic carriers. Price-conscious tourists may choose to return to EasyJet to whisk them away to warmer climes. This looks like it’s already happening. Upon PM Johnson’s proclamation the UK is on a “one way road to freedom”, EasyJet UK outbound flight bookings grew 337% while package deals took fight, soaring to 630%, compared with the previous week. You probably wouldn’t expect that to be sustainable, but it’s an indicator that short-term gains could be there with EasyJet stock. 

Expedia 

As we touched on earlier, Expedia stock has enjoyed 200% growth since its collapse in March. It is not yet back up to pre-pandemic levels, but few if any are anywhere near close to that level. But why is Expedia of potential interest to investors interested in travel stocks? 

One thing there is a big cost cutting programme coming. Now, this might not be music to all investors’ ears, but there is a reason why that may pique your interest. In 2019, Expedia’s operating income totalled $903 million. CEO Peter Kern suggested in December, Expedia will be looking at cutting between $700-750m in fixed costs, and a further $200m in variable revenue cuts based on 2019 levels. If it can pull this off, then Expedia’s earnings potential may effectively double. 

With lower travel restrictions in places like the UK in the rest of the year, Expedia may be able to secure more advance online bookings now too, as holidaymakers prep for trips the second half of 2021. This could very well support Expedia share price growth. We’ll have to wait and see but given the stock has already risen dramatically across the year, it might be worth looking at for those interested in travel stocks. 

Airlines jump on summer roadmap, Tesla sinks as Bitcoin crashes

Morning Note

When companies tie themselves to any one horse it presents risks, even if it’s the most-fancied filly at the post. Thoroughbreds are temperamental creatures and liable to break down when being ridden too hard. So, when Tesla tied its fortunes to Bitcoin with a $1.5bn investment, it was reasonable to expect there could be problems ahead. Yesterday, for various reasons Bitcoin crashed from an all-time high in a brutally swift drop that took prices from near to $58,000 to $47,400. At one point, prices plunged $5,000 in 10 minutes before paring losses and attempting a recovery, which stalled at $55k before turning lower to trade under $49,000 this morning. Musk may have spooked some participants with his tweet saying the price was ‘too high’. But I feel that was an in-joke for followers. More importantly the market was ripe for a sharp technical pullback after a parabolic move, the kind that usually comes down under its own weight. There could be further to tumble – a 30% drawdown as we had in January this year would see prices back to $40,000. Also, Treasury secretary Janet Yellen – clearly not a cheerleader – warned that “Bitcoin is an extremely inefficient way of conducting transactions and the amount of energy that’s consumed in processing those transactions is staggering”.  

 

Tesla shares fell sharply, closing down 8.55% on the day and finishing under its 50-day simple moving average. Shares are now down over 17% since the company reported it had purchased around $1.5bn in Bitcoin to hold on its balance sheet. The fall in Bitcoin yesterday may have dragged the stock down further, such is the symbiotic relationship being perceived in the market. But we also should stress that the technicals and options market activity have also been signalling a sell-off coming for Tesla.  

 

The wider tech sector fell. Shares in Apple, Amazon and Microsoft all dipped by 2% and the Nasdaq closed down 2.5%. The Dow Jones turned around a 200-pt drop at one stage to finish up by 0.1%. Shares in GameStop (remember that?) rose 13% to $46 as it appeared that Keith Gill, aka Roaring Kitty, had doubled up on his stake, following his appearance at the House Financial Services Committee in which he said he still liked the stock at $44.  

 

European stocks were mixed early on Tuesday with the DAX down and FTSE 100 higher. Crude oil prices rose with WTI north of $62 and Brent above $65 with US output expected to recover slowly from the winter storms. Treasury yields continued to rise with 10s spiking above 1.38% as Janet Yellen reiterated that now is not the time to do too little. Jay Powell begins his two-day semi-annual Congressional testimony today – will he push back on yields? I doubt it – the Fed is happy to let the economy overcook this year. The market may actually prefer a bit more of a steer.

 

HSBC said it will restart dividends despite reporting a 34% drop in annual profits – all ancient history. Pre-tax profits slipped to $8.8bn from $13.4bn previously as Q4 adjusted profits fell 50% and loan loss impairments rose by $1.2bn. Dividends to resume at $0.15 a share.  

 

Airline shares roared higher on the promise of a salvaged summer season, following the government’s outline of how Britain will escape the pandemic restrictions. International travel will remain problematic and subject to restrictions, isolation and testing, but bookings have shot up. IAG rallied 8%, Ryanair rose over 4%, while easyJet jumped 10%. TUI climbed 6%. IHG shares rose 3% even as it struck a cautious tone and warned recovery would not really take place until later in 2021. Strong efforts to cut costs meant FY results were a little ahead of expectations, however.

Airline shares roar on high optimism.

 

Sterling seems to reflect optimism about the reopening of the UK economy after Boris Johnson’s roadmap out of restrictions. It may be slow and abundantly cautious, but words like ‘irreversible’ raise hopes that by June we really will be beyond Covid. GBPUSD made fresh 3-year highs close to 1.41 as the dollar softened – the failures by DXY to rally out of the descending trendline marked by the Feb 17th failure at 91 – point to more dollar weakness. EURGBP also dipped to its lowest in a year as the pound rallied.

GBPUSD made fresh 3-year highs close to 1.41 as the dollar softened

 

For gold, yesterday marked a strong reversal but the medium-term downtrend remains in force.

For gold, yesterday marked a strong reversal

IAG, EasyJet & Ryanair: should you invest in airline stocks this year?

Investments

2021? Ryanair, EasyJet and IAG stocks are under observer’s watchful eyes right now and could find their wings once again in the coming year. Are they worth investing in right now?

Should you add IAG, EasyJet or Ryanair stocks to your portfolio?

Why Airline stocks could bounce back in 2021

Air travel stocks have taken a beating over 2020. Forbes reports that the NYSE Arca Global Airlines Index lost more than 31% over the previous year, with many major carriers reporting losses. As a whole, industry revenues fell 65% year-on-year across the board. Unfortunately, we have seen bankruptcies. UK affordable carrier Flybe was one such victim.

But there may be some hope that good flying conditions could emerge later in 2021.

Firstly, global cases may be starting to drop as research from John Hopkins University in the US suggests. From a January peak of 700,000 cases per day, the number has fallen to 500,000. That’s obviously still an alarming figure, but the drop is encouraging.

Vaccines continue to instil hope that some form of normality is in sight – maybe not crystal clear in a clear light of day, but still an emerging glow at the end of what seems like a very long tunnel. Uptake in countries like the UK and Israel has been exceptional, and its hoped vaccine programmes in other countries can catch up.

In some countries who reacted well to the virus, casual travel is already starting to return. China, for instance, saw over two million seats occupied on domestic flights towards the tail end of last year, and is projected to reach 90% pre-pandemic capacity by 2020. Indian carrier IndiGo’s CEO Ronojoy Dutta is confident domestic levels will reach 100% of pre-pandemic capacity by April. Australia is doing well too.

We’re stressing those numbers are domestic. International travel will take longer to recover, but it does offer a sliver of hope that normality for airlines could return in 2021.

However, with so many things about this pandemic, we simply don’t know. Airline stocks like EasyJet, IAG or Ryanair shares, may be worth buying now to hold onto later, but all investing and trading is risky. This may incur substantial losses if you are not careful or if market conditions do not enjoy less stormy skies.

EasyJet stocks

EasyJet lost two-thirds of its market cap in the pandemic’s initial phase. Since then, despite its fleet being grounded, despite the layoffs, and despite the cloudy outcome for airlines in general, the stock has regained 44% of its value. It may still be trading below its 1,500p pre-pandemic levels, but as of today, EasyJet shares are trading for about half that.

Cash reserves are a good barometer of a business’ resilience. EasyJet says it has about £2.5bn in cash reserves against monthly expenditures of £160m. That means it has enough to last the year. Backed with a £1.4bn government loan, the budget carriers balance sheet has been strengthened.

A potential explosion in international travel post-lockdown could mean UK travellers turn to low cost favourites like EasyJet to ferry them to warmer climes. That could mean a new rally on EasyJet stocks. For now, though, keep a watchful eye on them as uncertainty still in the airline industry.

IAG stocks

IAG owns British Airways, amongst other airlines, and is weathering the storm like all major carriers. IAG stocks have fallen 64% in the past twelve months, with its market cap falling to £8bn. Revenues have slumped too, falling over 70% in the third quarter. Not great.

Like EasyJet, however, British Airways was able to secure its own government-backed loan, to the tune of $2bn, to keep operational, so cashflow should be less of an immediate concern for investors right now.

Is this a case that IAG is simply too big to fail? Potentially. There may also be a bit of national pride playing into sentiment here. British Airways is after all the UK’s national carrier, and given the jingoist feeling of the current Conservative government, letting BA hit bankruptcy, especially in the face of Brexit, wouldn’t exactly play well with the Tory voter base.

IAG may have what it takes to show long-term price recovery. In September, IAG announced it had raised around €2.7bn in capital (£2.3bn), which would take total liquidity to €6.6bn (£5.7bn), with cash reserves of €5bn (£4.3bn). Forecasts suggest it may return to profitability by 2022, and even begun paying dividends again by then.

With the IAG share price rising 80% of the last six months, there may still an inkling of investor confidence surrounding the Group. But be warned: IAG is still trading 45% lower than its record highs, and with the way the industry is, until the planes start flying high, stocks might stay terrestrial.

Ryanair Stocks

Ryanair share prices are down 13% y-o-y in January, but, like the other stocks mentioned here, may have enough liquidity in the bank to ride out the coming year. According to Morgan Stanley, Ryanair has enough cash reserves to keep going for the next 15 months, totalling €4.5bn (£3.9bn).

Predictions in the short term are not great. Ryanair stocks may record losses of up to 73 US cents per share for the fiscal year ending March 2021. However, next year, earnings-per-share could be back up to 56 US cents.

Why? Well it’s a mixture of things, but its mostly vaccine-driven recovery leading to a loosening of travel restrictions. As suggested above, Ryanair has the liquidity to withstand another year, and there may be further potential for acquisitions, picking up airlines that are nearing bankruptcy, if market recovery starts to bear fruit towards the end of 2021.

Credit Suisse has confidence in Ryanair’s ability to improve cash flows going forward. The Swiss bank forecasts Ryanair to make €1bn in advanced bookings for the last quarter of 2022, and a further €600m in positive flows by that year’s end.

Ryanair stocks maybe one to watch.

But again, investment and trading always come with a high level of risk. Uncertainty is high right now for the entire aviation sector. Positive price movements for Ryanair stocks, as well as EasyJet and IAG shares, will be focused more on financial resilience and pandemic-battling measures in the short term.

 

EasyJet posts first annual loss

Equities

EasyJet posted an annual loss for the first time, underlining the extent of the pandemic-related done to the airline industry.

The company reported a loss of £1.27bn in the year ending September 30th, vs a profit of £430m in the year before. Capacity decreased by 47.5% but loads were only down 4.3 percentage points to 87.2% due to tough action to reduce capacity. Revenues declined over 50% to £3bn and the headline loss before tax of £835 million was within the guidance range of £815 to £845 million, vs £427m profit last year.

Whilst it has been a tough few months for EasyJet, hopes of an effective global vaccination programmes bodes for a much stronger 2021. Its cash position looks reasonable total liquidity raised of £3.1 billion, and a net debt position of £1.1 billion vs £326 million in 2019. No dividend will be paid in light of the loss for the year – last year it was 43.9p.

Outlook: Based on current state of lockdowns and travel restrictions in the markets in which it operates, easyJet expects to fly no more than around 20% of planned capacity for Q1 financial year 2021. However, given the extent of uncertainty, management declined to provide any further financial guidance for the 2021 financial year.

The problem for EasyJet is that getting travel demand back to where it was is going to take time and whilst there are vaccines in the offing, investors may need to wait patiently. The guidance for flying only 20% of capacity in Q1 underlines the sluggish pace of demand recovery in key markets affected by the coronavirus. And whilst there are vaccines coming, there are timing issues here.

Moreover, there remains great uncertainty about the opening up of key passenger routes in the meantime given the capricious quarantine and lockdown measures in place across Europe. Shares, which have risen the vaccine bump until now, declined almost 3% in morning trading. Ultimately EasyJet will profit from back-to-normal but it may be agonisingly slow. The worst turbulence is behind, but it’s too early to unbuckle your seatbelts.

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