Investors who stay on board with Tui will ultimately reap the rewards

The stock’s recent performance has been dire but its long-term recovery potential is intact, writes Robert Stephens

Investing in shares is not always a pleasant experience. Although the stock market offers unrivalled long-term capital growth and income potential vis-à-vis other mainstream assets, it regularly delivers corrections and bear markets that can prompt temporary paper losses for investors. In Questor’s view, sticking with stocks through the bad times is key to successful long-term investing. Selling up because the economic outlook appears downbeat is unlikely to produce high returns – especially when assets such as cash, bonds and property come with their own challenges. Of course, cyclical companies will undoubtedly be affected by an economic downturn to a greater extent than their more defensive peers. It is therefore unsurprising that tourism group Tui has delivered significantly worse performance than the wider stock market over recent months. Its shares have fallen by 49pc, against a 24pc decline for the FTSE 250, since this column tipped them as a risky buy in December last year. This is despite the stock generating a 35pc paper gain within two months of our tip, which highlights the speed and scale of decline in market sentiment towards the company.

Certainly, it has experienced a challenging trading environment this year. Airport disruption caused by staff shortages has not been conducive to rising profitability across the industry, while concern about the impact of a cost of living crisis on demand for holidays has weighed on investors’ sentiment towards the sector.

However, the company’s recent results show that it continues to offer long-term investment potential. Its available cash resources stood at €3.9bn (£3.4bn) in August, which shows it has the financial means to overcome an economic downturn.

It has also been successful in raising capital throughout the pandemic, which suggests it can outlast many of its rivals should conditions deteriorate further.

The company’s financial outlook has been further improved by progress made in cutting costs. It has reduced costs by €240m since 2020 and is on track to meet a €400m a year efficiency goal by the end of next year.

In terms of trading performance,

Tui’s latest quarterly update showed that it continued to make incremental improvements as pandemic-related risks recede.

For example, bookings for this year’s summer programme amounted to 91pc of 2019 levels and it expects winter 2022-23 bookings to be at a similar level to pre-covid figures. It has also been able to increase the average price of its holidays by 18pc, which helped to offset rising costs in an era of rampant inflation.

Clearly, the near-term prospects for the business are uncertain. Rising interest rates and high inflation mean consumers will have less discretionary

income to pay for non-essential goods and services such as holidays. This could act as a drag on the company’s sales over the coming months.

However, in Questor’s view consumers are likely to cut back on a whole host of other non-essential items before they abandon their annual or six-monthly holiday. As a result, Tui’s financial prospects may not be as dire as the stock market is anticipating.

And with its shares having already declined by 52pc so far this year, they offer a wide margin of safety that accounts for the prospect of worsening financial performance that may ultimately fail to arrive.

Indeed, investors seem to have assumed that the economic outlook will be permanently negative. While challenges are almost certain over the short run, ultimately the economy will recover in the coming years.

Cyclical companies with the financial means to survive near-term challenges, such as Tui, are likely to be the biggest beneficiaries of a long-term return to economic growth.

Therefore, sticking with the stock is a logical response to what has thus far been an unpleasant experience for investors. Determining when the economy’s growth rate, investor sentiment and the stock market’s performance will improve is an impossible task.

But history suggests they will not be negative for as long as the consensus currently anticipates. Hold.