Anyone riding the red-hot rally in hotel stocks over the last three months might want to think about taking some profits or tightening up those stop-loss orders — if not checking out of their positions entirely.
Shares in giant hotel operators like Starwood (NYSE:HOT), Hyatt (NYSE:H) and Marriott (NYSE:MAR) have been clobbering the broader market since it took off on its post-presidential election rally in mid-November.
But now fourth-quarter earnings are coming in, and they’re pointing to much more muted gains ahead — at best.
“Although we continue to have a favorable view of the lodging sector over the medium- to long-term, we would not be surprised to see a near-term pullback in the stocks following the group’s recent run,” Ryan Meliker, an analyst at MLV Equity Research, wrote in a report to clients ahead of hotel earnings season.
And what a run it’s been.
Over the three months ended Feb. 12, the S&P 500 enjoyed an impressive 12% gain — but the big hotel stocks almost doubled up on the broader market. Marriott’s stock added 21% over the same span, while Starwood gained 23% and Hyatt logged a 24% rise.
Just have a look at the chart, courtesy of S&P Capital IQ, below:
Too bad a report from Hyatt Thursday pretty much confirmed the bad news we got out of Starwood earlier in the earnings season — and something we’re likely to hear again when Marriott releases quarterly results next week.
Take a look at the last couple sessions in the above chart, and you’ll notice that the hotel stocks are cooling off. That’s because revenue and revenue per available room — a key industry metric — are starting to soften up, mostly due to weakness in Europe and some markets in Asia.
There’s no way around it: Shrinking economies from the eurozone to Japan aren’t much good for the lodging business.
Shares in Hyatt slipped as much as 2% in early Thursday trading after the company’s fourth-quarter revenue missed Wall Street forecasts, hurt by sluggishness in Europe and the Middle East. At the same time, margins fell as costs increased. Profits dropped by about two-thirds year-over-year.
Starwood had a similar story last week. Profits fell on higher costs and sluggish international results, especially in Europe. And it was hardly unexpected. Nikhil Bhalla, an analyst at FBR, wrote in a note ahead of the report that he expected little improvement in international revenue per available room because of “continued economic softness in Europe and oversupply of hotel rooms in China and India.”
So, where does that leave Marriott? The largest U.S.-listed hotel stock with a market capitalization of $13 billion reports next week. Hey, if nothing else, Marriott should benefit from low expectations.
Wall Street already forecasts a 1% decline in year-over-year quarterly revenue, and the Starwood and Hyatt reports mean investors should be prepared for any disappointment on the international front.
Either way, if you’ve ridden these shares up, it’s probably not a bad idea to protect some gains. And if you missed the rally, some more disappointing quarterly reports could serve up more attractive entry points soon enough.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.