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Two contrarian ideas for patient, long-term investing

Successful long-term investing requires buying undervalued assets and having a patient, disciplined long-term strategy. Here are two ideas.

As a business journalist, it can feel odd writing a bullish story on a company after its share price tanks. Or a bearish story on a company whose price soars.

The inclination is to praise booming companies and bag those that destroy wealth. But successful long-term investing requires a different mindset.

As I wrote last week, it can be hard buying sectors and stocks that have tumbled. Unrelenting negativity dissuades investors from seizing opportunities. The easier play is buying rising stocks spruiked by a chorus of cheerleaders.

But nobody makes money by following the crowd. That destroys wealth. The key is buying undervalued assets through patient, disciplined, long-term strategy.

That doesn’t mean being contrarian for contrarian’s sake. Sometimes, the best ideas are in rising sectors that have price momentum. Energy is an example. The rally in global energy stocks in the past two years is the start of a longer trend, in my view.

So, too, with copper, coal and other commodities. Less investment in new supply will underpin higher commodity prices this decade. Yes, there will be volatility – particularly if China’s economy slows – but commodity stocks have solid long-term prospects.

That said, the best opportunities are often in sectors that have been irrationally oversold due to poor market sentiment or in investor panic. I mentioned a few such sectors last week: Asian tech stocks, European banks and global biotech.

This week, I consider briefly two sectors that have fallen hard this year: global casinos and travel stocks. Again, it’s about identifying quality, undervalued companies.

And again, I’m using Exchange Traded Funds (ETFs) for diversified exposure to contrarian sector ideas, rather than buying a few stocks and taking individual company risks.

This strategy can involve investing in ETFs that are issued on overseas exchanges, due to a lack of sector representation on the ASX for some of these ideas. This strategy requires patience: beaten-up sectors can take years to recover. Here is a snapshot of the prospects for global casinos and travel-technology stocks, and an ETF to use for leverage to each idea.

 

1. Casinos/gaming

Casino stocks have had an awful few years. In the US, stocks like Wynns Resorts, Las Vegas Sands Corp and MGM Resorts International have underperformed. In China, casinos with Macau operations have been smashed due to the country’s COVID-19 elimination policy and its effect on casino patronage and gambling demand.

In Australia, the Star Entertainment Group and Crown Resorts (before its takeover) sunk on regulatory investigations over alleged money laundering. There’s been one problem after another for local and global casino stocks.

The good news is that some casino stocks look undervalued. Wynn Resorts has fallen from a 52-week high of US$99 to $US65.42. Las Vegas Sands Corp is down from US$48.27 to US$38.64. Since June, both stocks have rallied off their lows.

The VanEck Gaming ETF (NASDAQ: BJK) provides diversified exposure to 38 global casino and gaming stocks. Its top holding is Vici Properties, a US real estate investment trust that owns casino properties. I’ve always thought the main attraction for private-equity predators (who engage in casino M&A) is the underlying property value of casino operations and hotels, rather than their gaming operations.

BJK’s second-largest holding is Flutter Entertainment, the impressive UK online sports betting company that owns a portfolio of brands, including SportsBet in Australia. BJK also holds Aristocrat Leisure, Las Vegas Sands Corp and MGM International.

BJK has had a terrible performance. The one-year return (to end-August 2022) is minus 31%. Over five years, the annualised return is minus 1% and over 10 years it’s only 3.6%. Put another way, BJK has underperformed for a decade.

At its current level, BJK is on a trailing Price Earnings (PE) ratio of 9.5 times and a Price-To-Book ratio of 2.4 times. BJK is now trading at pre-pandemic levels.

Investors who seek exposure to sports betting over casinos could consider the Roundhill Sports Betting &  iGaming ETF (BETZ). It, too, trades in the US.

With BJK, prospective investors need to be comfortable owning an ETF that trades on the NASDAQ exchange. Currency risk is another consideration. Casino stocks can be volatile and online sports betting is a rapidly evolving market.

Caveats aside, I like the long-term outlook for casino stocks as the boom in middle-class consumption in Asia increases demand for gambling.

Like or loathe it, online sports betting is a growth market, particularly in the US after regulatory change for that sector.

 

VanEck Gaming ETF (NASDAQ: BJK)

Source: nabtrade

 

2. Global travel stocks 

Few sectors have been hurt as much by COVID-19 as travel. From airlines to airports, hotels and travel agents, the sector was crushed by lockdown uncertainty, international travel restrictions and lower capacity (particularly in airlines).

To make matters worse, rising inflation and interest rates worldwide are a growing headwind. Homeowners who are worried about servicing rising loan repayments are more likely to defer discretionary spending, such as expensive holidays. Or trade down from international to domestic holidays or other cheaper forms of travel.

The problems are reflected in the underperformance of travel stocks. The US Global Jets ETF (NYSEArca: JETS) is down 31% over one year to end-August 2022.

Traded in the US, JETS provides exposure to 51 global airline-related stocks. These include airline companies, aircraft manufacturers, airport operators and media companies that relate to airlines. About three-quarters of the ETF is in US stocks.

Although some airline stocks look cheap, I can’t buy a global airline ETF just yet and prefer to pinpoint airline stocks rather than buy the sector. Still, JETS is an ETF to consider for investors who want exposure to a recovery in airline demand.

My preference is the ETFMG Travel Tech ETF (AWAY). Launched in December 2020, AWAY tracks companies in the travel-technology industry.

Traded in the US, AWAY provides exposure to 32 global travel-tech stocks. Key holdings include Uber Technologies, Airbnb, Booking Holdings, Expedia Group and TripAdvisor.

AWAY has had lousy returns since launch, thanks to the ongoing effects of COVID-19 on travel demand. The one-year return is -41%.

Like other tech-related ETFs, AWAY has underperformed amid rising interest rates, which affect the valuation of companies with long-duration earnings growth.

But for all the short-term pain, travel technology has good long-term prospects. As AWAY notes, about two-thirds of millennials now book their holiday through their smartphone. Three-quarters use their phone to research their next trip.

I detest giving so much of my holiday booking to an online platform and seeing less go to the hotel or motel that provides the service. But these platforms are here to stay and have a lot more room for growth as other services are added.

Like the VanEck Gaming ETF, AWAY suits experienced investors who are comfortable using ETFs traded on overseas exchanges and understand currency risk.

Casino, travel and tourism stocks can be volatile and are big losers from COVID-19-related uncertainty and cutbacks in discretionary spending. But every stock has its price. After horrendous falls this year, global gaming and travel tech look interesting.

 

ETFMG Travel Tech ETF (AWAY)

Source: Yahoo Finance

 

 

All prices and analysis at 26 September 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.


About the Author
Tony Featherstone , Switzer Group

Tony is a former managing editor of BRW, Shares, Personal Investor, Asset and CFO magazines and currently an author at Switzer Report. He specialises in small listed companies, IPOs, entrepreneurship and innovation and writes a weekly blog for The Sydney Morning Herald/The Age on small companies and entrepreneurs.