Tuck Your Portfolio Into Some Comfy Hotel Stocks

by Tom Sandford
hotel room

Unless you have been investing under a rock, you’ve heard of the hotel industry’s rise back into the black.

When the recession hit in 2008, the industry took a beating as bank loans screeched to a halt. Once banks saw consumers were holding on to their dollars, they closed the purse strings on hotel chains looking to expand.

By late 2013, the industry was set to leap forward. Now it has.

According to travel analysis firm Smith Travel Research, hotels are back at occupancy levels not seen since 1996. For proof, analysts point to a 10% jump in “REVPAR,” or “revenue per available room” rates.

REVPAR is an important metric for the hospitality industry. Hotels handled $17 billion in transactions last year. This year, analysts expect that to top $25 billion.

As a result, hotels have been able to increase rates. The positive effects are showing up in reports and earnings statements, and investors are lining up. Here are the stocks of hotel chains with a knack for getting heads in beds.

A Sweet Deal for Market Leaders

The biggest winners of the rebound are also the most obvious ones. This year the largest chains in the industry, including Hyatt Hotels Corporation (NYSE: H), Marriott International Inc. (Nasdaq: MAR) and Hilton Worldwide Holdings (NYSE: HLT) have seen stock gains of around 26%, 33% and 23%, respectively.

On top of bold investors, analysts expect a rise in profits from room rate increases. According to PKF Hospitality, the occupancy rate of upper-end properties has reached about 70%.

With a large rate like that, hotels are less likely to cut deals to travel managers and middlemen like Orbitz Worldwide Inc. (NYSE: OWW). Instead, analysts predict hotel managers will demand a 7% to 10% rise in rates.

PKF predicts rates will settle at an increase of 4.2% this year and 5% every year after to 2016, as travelers are now willing to pay a bit more to get to where they’re going.

Analysts saw it coming in November 2013 when global booking rates for business travel were up 4.4% over 2012. Group sales at committed occupancy rates through November 2014 leapt by 7.4% over last year, too.

Analysts are bullish on the future of hotel stocks, as well.

“Investors and management teams see at least two to three more years of strong growth in this up cycle,” David Loeb, an analyst and managing director at Baird, told Forbes. “… Which is helping support stocks’ valuations and keeping them in favor with both real estate and non-real estate investors.”

Banks have been more open to lending lately. That means more rooms under construction and more profits. According to data company STR Analytics, firms plan to construct about 36,300 new hotels as of mid-February 2014.

That represents a nearly 18% increase from the same period in 2013.

An Alternative Invasion

When it comes to alternate accommodations, however, Airbnb is the gorilla in the room. The startup has taken the sector by storm, allowing property owners to rent out rooms for profit.

Airbnb’s value has surged to $2.5 billion. For investors, there is one major issue: The company is not publicly traded. CEO Brian Chesky says he has no plans to move forward with that this year.

For that, investors should consider HomeAway Inc. (Nasdaq: AWAY), a similar service that went up in value by 80% in 2013. As of Thursday, its sales growth is at 23.6% with $372.71 million in sales.

For an alternative hotel service, that is some mainstream income. It has also caught the eye of those in the traditional sector.

No Reservations Needed

As the economy improves, analysts expect the hotel industry to follow. Those investing in traditional hotels should not fear the rise of alternative hotels like Airbnb, either.

By nature, alternative accommodations are not as suited to business or group travel. That means those important revenue sources will not check out anytime soon.

Alternative accommodations aside, look to invest in industry bulwarks like Wyndham Worldwide Corporation (NYSE: WYN) or Marriott International Inc., which owns 20 brands with 200,000 rooms in 78 countries.

That should help investors rest easy.

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