No one is quite sure when travel will return to normal. It is quite possible some cities will shut down once again in the weeks to come, making it difficult for people to go on summer vacations, spend money and stimulate the economy. This means the airlines and the cruise industry are likely to suffer.

However, some companies are better positioned to survive a second shutdown along with a potential second wave of the coronavirus than others. Let’s take a quick look at three travel and leisure stocks to avoid as the COVID-19 pandemic plays out across the remainder of the year:

United Airline Holdings (UAL)

In theory, it’s prudent to own a holding company for two of the world’s top airlines. However, the coronavirus has changed just about everything, especially air travel. While the European Union’s coronavirus line graph heads down toward zero, the United States’ has plateaued. Our country’s comparably high rate of infection and death is sure to hurt the shares of UAL. In fact, several countries are considering banning travelers from the United States due to our ineffective approach to mitigating the spread of the coronavirus.

UAL is in a difficult position as its credit default swaps have traded at a comparably high 54% spread. This is an important metric as it reflects the company’s credit stress. A particularly high credit default spread indicates default is likely to occur. Though UAL has enough cash to survive a couple more financial quarters, there will likely be some equity dilution along with leveraging in the year ahead.

UAL is a POWR Ratings dud with a “Strong Sell” rating and a Peer Grade of “D”. UAL’s price returns across six months, one year, three years and five years are all deep in the red. Making matters worse is the fact that six analysts recommend holding UAL while only five recommend buying it.

Carnival Corporation (CCL)

In these uncertain times with economic and health concerns, investing in cruises is not a wise choice. A cruise ship is just about the last place people want to be as the pandemic plays out. CCL might not go out of business in 2020, yet its stock certainly won’t attract many new investors unless a vaccine is available in the near future.

Travelers are much more likely to buy a plane ticket or a train ticket rather than travel by cruise simply because there is the potential for a coronavirus outbreak to leave the ship stranded on the water for weeks or even months. Furthermore, the Centers for Disease Control and Prevention (CDC) has stated cruise ships should not sail until specific standards are met, and the virus is no longer considered a public health emergency.

It is quite possible cruise ships will remain parked at ports through the summer and beyond. Furthermore, CCL executives are being criticized for the manner in which they relayed information about the virus to passengers as well as crew members. Take a look at CCL’s balance sheet and you will find $14 billion of debt yet a little more than $1 billion in cash. Furthermore, the POWR Ratings for CCL are terrible. It has a Peer Grade of “C” and an overall rating of “F”.

American Airlines Group (AAL)

At one time, AAL was an industry stalwart. Since the coronavirus, its fortunes have flipped. Even Warren Buffett has dumped his position in the company. AAL recently upgraded its fleet of planes in an attempt to modernize and drum up business. As a result, AAL now has net debt in excess of $30 billion, meaning there is minimal, financial flexibility going forward.

The POWR Ratings for AAL are dismal. It has a “D” for Industry Rank, “D” for Peer Grade, and an overall rating of “F”. Steer clear of AAL until the coronavirus situation shows improvement.

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UAL shares were unchanged in after-hours trading Thursday. Year-to-date, UAL has declined -60.62%, versus a -3.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management. More...

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