If you truly want to outperform the market in the long run, then you need to be aware of the times when the market misprices a security. That’s the fundamental idea behind value stocks — that the market does not recognize undiscovered value in a given security.
When such a situation arises, you have to do some solid research … and if it confirms your belief, you have to have some courage to jump in.
I tend to track about 40 or 50 securities, becoming an expert in their businesses and stock movements. Historically, these securities have — at one time or another — been underpriced by the market. My best returns have been in these stocks.
We have that situation now with Ashford Hospitality Trust, Inc. (AHT) as well as its 8.45% Series D Preferred stock.
The market rarely has granted Ashford the multiple it deserves as the best-managed hotel REIT. For whatever reasons, analysts and investors just don’t see what’s right in front of them. Ashford management has been in hotels for the past 30 years.
Ashford has always had a deft touch with the credit markets, being able to draw down credit as needed, restructure and extend maturities as necessary, and stayed highly liquid throughout the financial crisis. All of its current debt is non-recourse, i.e. property level mortgage debt, so the debt is secured by hotels, not company assets.
During the downturn, Ashford cut cuts aggressively. It cut its common dividend like all other hotel REITs, but never cut its preferred dividend, whereas most other hotel REITs did.
Ashford’s metrics are better than most every hotel REIT. A solid 60% of Ashford properties are managed by a related subsidiary that has more experience in the hotel management business than virtually any of its peers. Its management subsidiary, Remington, has consistently outperformed non-Remington managed properties in terms of RevPAR growth since 2009.
Remington has also outperformed EBITDA flow-through in 7 of the last 8 years. AHT management stands behind its work, with 16% insider ownership, more than three times higher than its nearest peer. It is geographically, brand-, and EBITDA-diversified and generated a 15% forward leveraged cash flow yield on its most recent acquisitions.
Ashford Stock Is Being Unfairly Punished
Yet all of this gets ignored. Instead, the market is focused on two items which I consider to be non-issues. First, AHT said it wanted to sell some of its upscale hotels so it could move more into upper-upscale and full-service hotels. The market appears to have cooled rather quickly, stifling that strategy. That hardly, however, changes any of the great performance its current properties are delivering.
The second issue actually affects an AHT spinoff, Ashford Hospitality Prime (AHP). An activist hedge fund is unhappy with how the sale process is proceeding, and in my estimation, has launched a pointless and distracting proxy fight to challenge management instead of leaving it alone to conduct its strategic review. Ashford’s history has demonstrated it creates long-term shareholder value. Ashford responded to Sessa Capital’s nonsensical lawsuit with this press release which is dead-on. Proxy voters should be advised that Sessa, in my opinion, has its own interests prioritized over that of shareholders. AHP assets are, in my estimation, worth $23 at a minimum.
The result is that AHT stock is trading at $5.45. That’s below the price of its IPO in 2003. That’s ridiculous considering the vast improvement in the overall portfolio and performance since then. Not only that, AHT continues to pay its 48-cent annual dividend with no problem whatsoever. It’s yielding 8.8%!
It’s possible the market is pricing in a recession, but other hotel stocks certainly aren’t struggling this badly.
I see AHT stock as being easily worth more than $11 per share, which is where it was trading before all this nonsense began. As for AHP, it trades at $10.30, down from the high-$14 range when a strategic sale was first announced, and as I said, I think it is worth $23. It also yields 3.9%.
Finally, we have the Preferred D series. Par is $25, and the stock was trading above that for some time. Almost every other hotel REIT’s preferred stocks are selling at or above par. Yet, AHT has its preferred D sitting at $21.90. It is unquestionably worth $25, so not only is there a chance for a nearly 15% capital gain, but its yield is presently about 10% also.
Could the stocks fall further? Yes. I hope they do; AHT fell to 78 cents per share in the financial crisis, and I made 13 times my investment after. The Preferred fell to $7 per share, and I made more than three times my money after it recovered.
I own all three stocks, and if you want to outperform the market, I suggest buying all of them now.
EDITOR’S NOTE: Adds info pertaining to AHP.
As of this writing, Lawrence Meyers owned AHT, AHP and AHT-PD.
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