Investing based on megatrends is risky. The trend’s power and accompanying hype can seduce novice investors who extrapolate growth too far into the future. Or forget that the market factored the trend into share prices long before the media spotted it.

This danger lurks in travel and tourism stocks. The boom in Asian tourism to Australia should run for years, as another 3.1 billion people join the middle class by 2030, on OECD estimates. That means more volume at Australian airports, hotels, casinos and tourist attractions.

I have written about this inbound tourism boom several times for The Switzer Report over the past three years, nominating Sydney Airport, Mantra Group, The Star Entertainment Group and Sea Link Travel Group as key winners from the trend.

Flight Centre, another favourite, was included in this Report’s Takeover Portfolio, as was the disappointing theme park and family restaurant operator, Ardent Leisure Group.

So far, so good. Sydney Airport’s three-year annualised total return (assuming distribution reinvestment) is 24%. Mantra Group, likely to be acquired by AccorHotels (pending Mantra shareholder approval) has a 16% annual return over three years.

The Star Entertainment Group is up 19% over that period, SeaLink has returned 32% and Flight Centre is up almost 10% over three years, after rallying this year. Ardent blotted the performance with a minus 13% return over the period.

Airline stocks have also soared: Qantas Airways’ three-year annualised return of 49% makes it one of Corporate Australia’s great turnaround stories. Micro-cap airlines Regional Express Holdings and Alliance Aviation Holdings have almost doubled this year after a tough period during the mining downturn.

In travel agents, the impressive Corporate Travel Management has a 33% annualised gain over three years. I overlooked Corporate Travel, believing it looked expensive, only to watch it rally. Turnaround play Helloworld has a 50% annualised three-year return and Webjet has a 61% annualised gain. I suggested taking profits on Webjet in January.

Suffice to say, it’s hard to find value in travel and tourism stocks. Still, early investors in the trend can justify holding their tourism stocks: the trend is well entrenched as many more tourists from, China, India and South-East Asia visit our shores. But it’s hard to buy tourism stocks aggressively at these prices: better to wait for value during market sell offs.

As the market focuses on soaring travel stocks, I’ve looked for tourism-related stocks that missed the rally. There are not many available and each has higher risk. But in such a cyclical sector as tourism, the big tailwind of inbound Asian tourists should eventually boost these companies when they get their act together and their luck turns.

Here are three stocks to watch: two have underperformed the travel-stock rally and a third arguably should be worth more. That does not make them a buy, but value investors who want exposure to the inbound tourism boom – without paying inflated valuation multiples – could do worse than investigate these stocks.

1. Auckland International Airport

Like Australia, New Zealand is attracting record tourist numbers. About 3.6 million people visited there in 2016, up 16.2% on a year earlier, thanks partly to Asian tourism demand and international exposure from blockbuster movies, such as the Lord of the Rings and Hobbit trilogies, filmed in New Zealand. That’s not bad for a country with 4.6 million residents.

Growth in inbound tourism is a boost for Auckland International Airport (AIA), much as it is for Sydney Airport in Australia. About 70% of all international tourists to New Zealand pass through the airport.

AIA has a decent three-year annualised return (19%) but is down 3% this year. Sydney Airport is up 21% on a total-return basis.

In a rising market, AIA has fallen from a 52-week high of $7.05 to $5.55. That’s despite AIA reporting a better-than-expected FY17 result. Adjusted after-tax net profit rose 16.5 % to NZ$247 million, thanks to strong domestic and international passenger growth.

The market sees FY18 as a year of consolidation, in part due to AIA guiding for modest top-line sales growth. I expect stronger growth in FY19 and beyond as the airport’s redevelopment drives a step-change in retail sales revenue due to greater floor space.

Macquarie Equities has an outperform recommendation and 12-month price target of A$7.07. That suggests reasonable upside from the current share price from a high-quality, defensive asset that is benefiting from continued strong passenger growth and has a potential re-rating catalyst in the next few years from airport redevelopments.

Auckland International Airport

Source: ASX

2. Reef Casino Trust

As a thinly traded micro-cap that is barely researched by broking firms, Reef Casino Trust suits experienced investors comfortable with higher risk.

The owner of the Reef Hotel Complex in Cairns has a negative 23% total return over 12 months. The trust has fallen from a 52-week high of $4.08 to $2.81, in part due to a sluggish Cairns economy, lack of direct flights from China and construction disruption.

Casinos Austria AG, 42% owner of Reef, announced in August that it is reviewing its holding – a move that could result in the sale of its international casino portfolio.

That could free up Reef’s share register and inject much-needed liquidity into its stock.

Persistent speculation of a second casino in Cairns has also weighed on Reef shares. The Queensland Government’s rejection this year of $3-billion casino resort on the Gold Coast has, according to some observers, put Cairns at the top of the State’s casino race.

One proposed casino development at Cairns has been pulled and newspaper reports suggest several groups are examining the casino market in Far North Queensland. The State Government’s Global Tourism Hub plans for Cairns have sparked interest.

Talk of multi-million developments in regional Queensland towns inevitably attracts headlines about “investment booms”. I cannot see how Cairns, with a population of 160,000, could support a second casino. Australia’s largest capital cities have each had one casino for years, but Cairns apparently is large enough to host two.

Reef Casino Trust is hardly bursting at the seams. To my thinking, the interest in a second casino highlights Cairns’ outstanding potential to develop a larger tourism industry. And for an expanded, upgraded Reef to capitalise on the city’s growth.

The recent refurbishment of level one of Reef’s casino has boosted visitors to its new bar and café/restaurant facilities. What Reef most needs is direct charter flights from China to Cairns, something that must happen if the city is to become a global tourism hub in Queensland.

I expect Reef’s fortunes to turn in the next few years as the North Queensland economy recovers on the back of stronger resources activity and new mine developments. Faster growth in domestic and international tourism to Cairns, and Reef’s leverage to a possible development boom in the city, are other medium-term attractions.

At the current price, the market is focusing too much on the risks for Reef and not enough on the opportunity. And perhaps overlooking it given its small size and lack of research coverage.

Potential upside from Reef’s other joint owner, Accor, is also worth considering as the international hotel group ramps up its interests in Australia, and if Casinos Austria leaves the Reef register.

Reef Casino Trust

Source: ASX

3. Apollo Tourism & Leisure

Apollo Tourism & Leisure has hardly missed a beat since listing. The caravan group has delivered a 28% total return over one year, but can do better as the market grasps its potential and as it gets more history as a listed entity.

Apollo makes, rents and sells Recreational Vehicles (RVs) such as motor homes, camper vans and caravans. Its target market is older customers who want independent holidays.

Apollo’s business model has three parts. First, the company has exclusive licence and distribution agreements with Winnebago and Adria in Australia and New Zealand. The target market is middle to retirement-aged Australians – the so-called “Grey Nomads”.

The second part involves Apollo targeting domestic and international tourists who want to rent an RV for their holiday. This, too, is a growth market as international travellers who have already visited Australia a few times seek do-it-yourself holidays.

Apollo has a strategic investment in CanaDream, a Canadian rental-fleet operator listed on the Toronto Stock Exchange that has seven offices in that country and a fleet of more than 1,000 RVs. Apollo targets consumers in Europe and the United States and looks well placed to benefit from expected growth in Asian consumers who seek independent travel.

The third component is the sale of new and ex-rental RVs through its own sales centre and selected dealers in Australia. Apollo sells new and ex-rental RVs in New Zealand and the United States through a network of external dealers.

Apollo is not well researched by brokers or has much media coverage. Some astute small-cap fund managers latched on to Apollo when it listed on ASX through an Initial Public Offering (IPO) at $1 a share in November 2016 and have bought more shares since.

Apollo can do better than the market expects in the next few years given its position in a long-term growth market and options for faster growth through short-term rentals. The well-run company has more potential than many small-cap travel-related stocks.

Apollo Tourism & Leisure

Source: ASX

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.