Have you heard of the term ‘widow-maker’? It refers to a particular type of arterial blockage that generally leads to death.
Unsurprisingly, the phrase has found its way into the markets. When you hear someone say they are making a widow-maker trade, it means they are taking on a highly-speculative trade, with the potential for incredibly large losses.
It’s different in each country. In the US, they commonly call futures trading on heating oil the widow-maker trade. In Japan, it’s shorting Japanese government bonds. In Australia, it’s short selling any one of the Big Four banks.
Over the past decade, I’ve heard many analysts call for an Aussie banking system collapse. International credit ratings agencies, like Standard & Poor’s and Moody’s, even downgraded their ratings for the Big Four banks only two months ago. Loaded up with $1.6 trillion in mortgage debt, to international eyes, the system looks shaky.
The Aussie banking system hasn’t fallen over. To be honest, I don’t suspect the Big Four will crumble anytime soon. Unless you’re a short-term trader looking to profit from small dips in the banks, stay away from shorting the banks.
However, a new widow-maker trade has made its way into the markets. And that’s the online travel sector.
Short selling Australia’s largest travel agency, Flight Centre Ltd [ASX:FLT], is how you cut your teeth in the money management sector, according to Chad Slater, an asset management analyst at Morphic Asset Management. He says the way to make your name in this industry is by losing money short selling FLT.
Back in June, Bloomberg reported:
‘Bears are wagering that Flight Centre’s customers are finally moving online, where margins are lower, just as Australian consumers cut discretionary spending during a tough period for the economy. Bulls say the company’s current challenge is temporary because fares, pushed down by discount airlines, will rise again, and customers…will keep coming back.
‘“You haven’t made your name in a long-short fund if you haven’t lost money shorting Flight Centre,” said Morphic Asset Management Pty’s Chad Slater…“People still use these businesses more than I expected them to.” Slater said he’s been in the losing camp before and currently doesn’t have a position in the stock.’
In February, the company announced that net profit after tax (NPAT) fell 22.4% for the first half of the 2017 financial year. FLT then downgraded earnings for the second half. To a short seller, it looked like easy money. Flight Centre wasn’t tipped to have a good year.
Then full 2017 data rolled in, and things weren’t that bad. Full year NPAT fell 5.6% to $230.8 million — a huge turnaround from the 22.4% in the first half. And the full-year dividend dropped to $1.39 per share, down 16 cents from the year before. Meaning, investors are still receiving a reasonable income from the stocks.
In tight trading conditions, the travel business managed to increase revenue by 1%, to $2,677 million, and total transaction volume grew 1.3%, to $20.7 billion.
Clearly there were smiles all round, as the share price rallied 7% on the results. Flight Centre management claimed that low airfares hurt prices but, because of low airfares, people travelled more. FLT had both record ticket volume sales and room nights.
Nonetheless, investors didn’t wait for this news. With analysts predicting the end for bricks and mortar retailers, however, Flight Centre has defied the odds. Since March this year, FLT shares have rallied an incredible 74%, from a year-to-date low of $28.22. FLT now hovers around $49 per share, just $5 shy of its all-time high of $54 in early 2014.
Travel industry thrives
The team at Cycles, Trends and Forecasts pointed out this trend a couple of months ago. They noted that most stocks related to the travel industry were thriving. Air New Zealand Ltd [ASX:AIZ] for example, is up 58% in the past 12 months. And our own flying kangaroo, Qantas Airways Ltd [ASX:QAN], has climbed 65% in the same period.
It’s a similar story with Webjet Ltd [ASX:WEB]. From June 2016 to the last week of July this year, the share price increased 27.35%. The only thing that took the wind out of the sails was Webjet’s $165 million capital raising.
Webjet is a pure online retailer, but wants to be the world’s second biggest business-to-business travel agency. To do this, they’ve paid £ 200 million, or AU$330 million, for UK firm JacTravel to expand their global reach.
It’s easy to explain the share price increase for both Qantas and Air New Zealand. Record low crude oil prices have reduced overhead costs for both airlines, while at the same time cheap flights are likely to encourage people to travel.
The price rise in travel agencies, though, is part of something bigger. Nowadays, when you can use any one of the hundreds of travel sites to arrange flights and accommodation, why would you bother going through a massive global chain? More to the point, as sharing services like Airbnb expand their presence, why would anyone bother getting someone else to do the work for them?
Part of the reason travel agencies like Flight Centre are thriving is due to the ‘one stop shop’ approach. It’s easy. You drop your wish list to the agent, along with some dates, and a quote is emailed to you a day or two later.
What we don’t know is just how much the travel industry is benefiting from a large shift in demographics.
Right now, we are at the start of baby boomers retiring. In fact, more than a quarter of the workforce will retire over the next two decades. The impact this demographic has by packing up and doing all the things they couldn’t do while working and raising kids to travel the world isn’t being discussed. Collectively, they aren’t known for being the most tech-savvy group. Yet, they’ve got money to burn.
For now, in my view, it’s not a time to be short selling travel agencies. Like the baby boomers, I reckon their best years are ahead.
Editor, Markets & Money