Travel. It’s not exactly a booming industry in the current climate.
ASX travel shares like Webjet Limited (ASX: WEB) have been smashed this year as the coronavirus pandemic has brought the industry to a halt.
Some investors think travel shares are cheap to buy right now. Others think it’s like trying to catch falling knives.
So, what’s a ‘good price’ to buy ASX travel shares at in 2020?
Pricing in default and solvency risk
I think this is a big issue when it comes to the travel industry.
No matter how well run a company is, most wouldn’t have planned for their industry to totally shutdown for 1-2 years or more.
That’s exactly what has happened in the travel industry. International borders have been slammed shut while even domestic travel is heavily restricted.
That means booking services like Webjet have seen volumes dry up. It’s a similar story for Sydney Airport Holdings Pty Ltd (ASX: SYD).
Sydney Airport traffic numbers have plummeted this year. However, the Aussie airport does have one thing going for it: strong tangible assets.
Sydney is arguably as much of an infrastructure share as an ASX travel share. Many investors would argue that now is a great time to buy high-quality infrastructure assets for a low price.
Of course, buying ASX travel shares relies on them staying afloat. Personally, I think Sydney would be a safer way to get exposure given the tangible asset backing.
Even if earnings dry up, you’d imagine Sydney’s financial backers would want to keep their claim to the underlying assets. That’s harder for a service-based business like Webjet which relies on booking volumes.
The Sydney Airport share price is down 38.4% this year while Webjet shares have slumped 70% in 2020.
So, are they in the buy zone yet or should you be waiting?
When is the right time to buy ASX travel shares?
This is clearly a very individual decision. Every investor will have their own portfolio with different risk exposures and return expectations.
For me, I think it’s still too early to buy ASX travel shares. It’s hard to bet on a company that has very minimal cash flow for the foreseeable future.
I’d rather risk losing some of the upside potential for the safety of waiting to see some more financial numbers and operational forecasts.
There could be some great value in ASX travel shares at the moment but I’m not willing to take the downside risk to get the potential gains.
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More reading
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- Why Bubs, IAG, Star Entertainment, & Webjet shares are dropping lower
- These are the 10 most shorted shares on the ASX
Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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