Written by Forager Funds CIO, Steve Johnson for Money Magazine, August 2021 Edition. Article titled “Thanks to the work of Mr Market, big investment themes – such as a travel recovery – are already reflected in prices”
I, for one, am itching to go on an overseas holiday again. I’m writing this article from a lonely room in locked-down Sydney. My phone keeps tormenting me with “remember this day” notifications. Midnight meals in Milan with my work colleagues. Aperitifs in Cape Town with my wife’s South African family. Once Australians are allowed to travel again, I will be on one of the first planes out of here. And I won’t be alone.
As a fresh faced uni graduate I worked on Macquarie Bank’s bid for Sydney Airport. We had a beautiful chart that showed historical airline travel growing at 1.5 times the economic growth rate in almost every country around the world. That relationship held up nicely in the two decades since, and it’s a fairly safe bet that the trend continues after the world puts Covid-19 behind it. As humans get richer, they travel more.
That’s a bet we are explicitly taking in our Forager Australian Shares Fund. Its investments include three listed tourism stocks that we expect to do well when inbound tourism returns to Australia and New Zealand.
But, unfortunately, successful investing isn’t quite that simple.
If all we had to do was identify a fairly obvious theme and invest in it, our lives would be a permanent holiday. Investing is not about what you know. It’s about what you know that others don’t.
Mr Market Isn’t Stupid
Investing legend Ben Graham introduced Mr Market to investors in his 1930s classic The Intelligent Investor. His personification of the stock market illustrates how the rational, sensible investor can take advantage of irrational, emotion-driven moves in market prices. Some days Mr Market is depressed and wants to sell you his stocks at absurdly low prices. On other days he is wildly optimistic and wants to buy your shares for a fortune.
Here is the thing I have learned about Mr Market, though. He might be capable of irrational behaviour. We have seen plenty of that over the past 18 months. But he’s not stupid. In fact, most of the time, Mr Market is an incredibly prescient character.
His prices for your shares are the result of hundreds of thousands of investors expressing their views about the future. There’s plenty of research, best summarised in James Surowiecki in his book The Wisdom of Crowds, showing that the crowd gets it right far more often than any individual expert.
As a general rule, you won’t make any money predicting things that Mr Market already knows. And a travel recovery is the perfect example.
While its share price has been heavily diluted by an emergency share issue, the total market value of online travel agent Webjet, for example, is higher than it was prior to any mention of Covid-19. Flight Centre, too, is trading back near peak valuation levels.
Travel is going to recover, but the market prices of these companies already assume that this is the case.
Successful investments, then, don’t just require an insight. They require an insight that is unique. When it comes to Forager’s three travel-related investments, we aren’t just predicting that travellers return to our shores. We are predicting that these three companies will be bigger and better than before.
Experience Co’s transformation
Experience Co is an adventure tourism company. Adrenalin junkies’ favourite activity, skydiving, is offered across the country, but Experience Co also offers tours of the Great Barrier Reef and of the oldest rainforest in the world, The Daintree. Recent acquisitions include the Maria Island walk and Wild Bush Luxury, a company with walks and lodges in South Australia’s Flinders Ranges and in the Northern Territory.
We bought the stock a few years ago when the company was going through some difficult times. Previous management made a number of large investments in far north Queensland which predictably soured. The share price tumbled, and we started buying some shares.
Around mid 2019, the board brought in a new management team with some seriously impressive tourism experience, including the former Managing Director of Tourism Australia, John O’Sullivan as CEO.
O’Sullivan and his team set out on a business simplification process which saw the divestment of a number of assets and a significant reduction in the cost base. Luckily, as it turned out.
The sale of these assets reduced the business’s net debt from $30 million to $2 million. It allowed the business to survive Australia’s summer of rampaging bushfires and impact of the current international tourism drought. While other tourism businesses were haemorrhaging cash and undertaking emergency capital raisings, Experience Co didn’t need to issue a share.
The company recently announced a $6 million venture with the Queensland Government, investing in a pontoon on the Great Barrier Reef to be opened by 2022. The pontoon is to be built around the concept of science, sustainability and sea country. It will offer an indigenous experience through sea rangers, a working lab with marine biologists to share scientific knowledge, and will be built with sustainability a focus, in particular the use of solar and wind power.
Experience CO is surviving off domestic tourism alone. And the share price, too, has recovered to the levels of early 2020. But when international tourists return en masse, hopefully in 2023, it’s our belief that this lean, restructured business will be significantly more profitable than ever before.
Campervan rental companies Apollo Tourism and Leisure and NZ-listed Tourism Holdings are the other two tourism-related stocks. The thesis is largely the same. Mr Market is anticipating a recovery, but he’s underestimating the amount of structural change both companies have made to their businesses.
Roughly right, most of the time
A year ago, all three of these stocks were trading at fractions of today’s prices. The prices offered up by Mr Market were so low that the only question you needed to answer was will the business survive?
Today’s argument, as I have laid out, is far more nuanced. I think those three travel stocks will be good investments from today’s prices. But I am far less confident of exceptional returns than I was just 12 months ago. And this is true across the wider Australian stock market. Many high flying growth stocks have seen their share prices come back to far more reasonable levels. Companies selling commodities and other traditional value stocks have performed well over the past six months, making today’s prices a far better reflection of their future prospects.
There are pockets of opportunities. Most of our Australian Fund portfolio consists of businesses that we think have made permanent structural improvements that have been masked by the impact of COVID. But most prices today reflect a fairly sensible view of the future. He will get depressed again, but for now Mr Market should be getting the respect that he deserves.
Written by Forager Funds CIO, Steve Johnson for Money Magazine, August 2021 Edition. Article titled “Thanks to the work of Mr Market, big investment themes – such as a travel recovery – are already reflected in prices”
” The pontoon is to be built around the concept of science, sustainability and sea country. It will offer an indigenous experience through sea rangers, a working lab with marine biologists to share scientific knowledge, and will be built with sustainability a focus, in particular the use of solar and wind power”
They fabricate 250 tonnes of steel drag into the middle of the Barrier Reef, have diesel power boats take hundreds of tourists out each day, who have been flown in in kerosene guzzling jets and are staying in edifices of concrete and steel on the mainland, and it gets called SUSTAINABLE. Fair dinkum Steve, don’t start falling for the BS these clowns of CEOs tell you! (I like you Steve – but this paragraph was just too much!).
On the International side, Flughafen Wien (Vienna Airport) share price is still well below its pre-COVID level. It is surprising since the travel recovery in Europe has already started.
Is it a sign of general over-valuation of Australian market vs European?
Thanks Steve,
Looking at European airports, most of them are still down on pre-pandemic prices. Copenhagen is the only one I can think of that has hit fresh highs, although it’s given a lot of it back over the past month or two. Aena, which owns the main Spanish airports, is closest of the rest to new highs. It’s very exposed to leisure travel, markets are more confident of a near term rebound here vs business travel. The rest of the European airports are down maybe 20%-40% on pre-pandemic highs. Sydney Airport is also below pre-pandemic prices despite the bid by IFM. Of course, that makes a lot of sense with the equity issue last year and the continued uncertainty around when Australia might rejoin the world.
(Very) broadly-speaking, the price reactions in Europe make sense. All the cream in the airport business comes from throughput, and so if we’re not going back to 100% of old volumes (and more) in a reasonable timeframe, these assets are worth a bit less as a result. If new volume settles at, say, 90% of old volume (to pluck a number out of the air), these assets deserve more than a 10% valuation haircut.
That said, I expect record volumes through airports sometime over the next few years. That’s my forecast. But the market is being a bit less optimistic judging by stock prices.
The other variable to take into account is that long haul travellers are generally more valuable to an airport than short haul travellers. So it’s not just throughput that matters, airports need long haul travellers to return to the skies.
Thanks Gareth for your comprehensive answer. I just saw it now.
Your explanation makes sense and as you often mention “the market is right most of the time”. The difference is that you invest on a longer timeframe than most market participants.
I quite enjoyed the “sips and stocks” video. Rum which I’d associate with exotic, warm holidays should be fitting for the December quarterly report.