Checking Into the Hotel Sector

Travel and leisure is booming and these two stocks have room to run higher as we head into a seasonally strong period.

Last week a travel and leisure industry report showed that hotel occupancy is set for its best year since 2001. The report from STR showed the U.S. hotel industry recorded positive results in the three key performance measurements during the week of 18-24 October 2015.

In year-over-year measurements, the industry’s occupancy increased 1.7% to 70.6%. Average daily rate for the week was up 4.6% to $124.76. Revenue per available room (RevPAR) increased 6.4% to finish the week at $88.08.

The graph below shows how these growth numbers stack up compared to various years with the notable downturns following the 9/11/2001 terror attacks and the 2009 financial crisis and the 10 year average. As you can see 2015 is on pace to show the best year since the peak in 2000.

Hotel rates 11.2.15

And this comes just as we enter the busy business and holiday travel season. Expectations are for occupancy to top the 80% level, which basically translates into “fully booked” and revenue per available room to (RevPAR) to close in on a record $100.

Driving the gains are low fuel prices, competitive airfares, strong corporate profits and improving employment picture. This all has added up to both businesses and families loosening up the purse strings when it comes to making travel.

Room to Run

Given these terrific fundamentals it’s somewhat surprising that many of the hotel and lodging stocks such as Hilton (HLT), Starwood (HOT) and Marriott (MAR) despite reporting solid earnings last week and recovering from the October lows remain down year-to-date.

One of the issues weighing on the shares have been concerns that the robust growth in demand and rates will lead to oversupply. Indeed investment in lodging construction is up 39% so far this year and expectations are for the number of rooms to which increased by 18% from 2013 are expected to grow in the low double digits for the next three years. In fact profit margins did slip by 25 basis points in the third quarter as increase in room rates failed to offset the increase in construction, renovation and maintain spending.

There is also the issue of disruptive competition like Airbnb which is estimated to have grabbed up to 9% of room revenues in major cities such as New York and San Francisco and represent a “shadow supply” issue.

While I think the above stocks will continue to gain traction and move higher there is another subsector of hotel stocks that have more room to run; namely those that are structured as Real Estate Investment Trust or REITs.

REITs, which must pay out 90% of their taxable income in the form of dividends had been a among the best performers during 2012-2014 investors sought yield in the face of zero interest rate environment. But they fell out of favor in 2015 as there have been perpetual expectations for a hike in interest rates. Of course that has not come to pass and even when an initial quarter point rise does come rates will remain next to zero for the foreseeable future.

LaSalle Hotel Properties (LHO) and Host Hotels (HST) and are two

Companies I think are both well positioned to benefit from the strong industry fundamentals and a renewed attraction to their high yields.

LaSalle properties (LHO) owns 45 hotels, totaling approximately 9,200 guest rooms primarily upscale and luxury full-service hotels in 12 major U.S. cities and resorts in California and Florida. It operates brands such as Westin, Embassy Suites and Le Parc.

The company reported disappointing earnings on October 23 causing shares to gap lower to a new 52-week on heavy volume. But the stock has since rebounded suggested it is washed out and the $28 level presents a double bottom for a good risk/reward entry point.

LHO 110215

Even with the recent bounce shares are down 32% year to date and investors are now finding value with its attractive 6.2% dividend yield. I think the stock could move back to the $38 level over the next six-to eight months.

My suggestion is to buy the June $30 Calls @ $2.00 a contract

Host Hotels (HST) was formerly known as Host Marriott and owns and operates over 170 properties worldwide. Its focus is also high with brands such as Ritz Carlton and Four Seasons along with Marriotts. Its recent earnings beat estimates and but a decline in margins tempered the response and shares only moved modestly higher.

The company also announced a $500 million share buyback. Unlike some companies that have used share repurchase for lack of anything better to do with their cash hoards this seems like a timely purchase by management which views its stock as undervalued having declined by 30% year-to date. The stock currently offers a 4.3% dividend yield.

This chart is slightly more constructive with a higher low and potential inverted head and shoulders forming.

HST 110215

I think the shares could move back above $23 over the next six months.

The trade I’m suggesting is buy the April $18 Calls @ $1.00 a contract

A move back above $23 would make those calls worth $5 for a 400% gain.

Buying calls on these beaten down names offers a limited risk which will help you sleep well at night and if things turnaround you’ll be sitting in the lap of luxury.

— Steve Smith

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About the Author: Steve Smith