It was a miserable year for hotel stocks in 2015. While the S&P 500 was basically flat on the year, hotel stocks saw a 20.1% decline, and things haven’t gotten any better six weeks into 2016.
Interestingly, while hotel stocks aren’t doing well, the hotels themselves have rarely done better with industry metrics breaking records. It’s the golden age of hotels, but investors aren’t buying it.
But you should. After all, there’s a lot to be gained if you learn to zig when the markets zag.
Hotel stocks are dirt-cheap, which is providing investors with some serious investment opportunities. Don’t miss out — these are the 3 hotel stocks to own now.
Hotel Stocks to Buy Now: Hilton Worldwide Holdings Inc (HLT)
Stay away from the obvious choice — Marriott International Inc (MAR), which is merging with Starwood Hotels & Resorts Worldwide Inc (HOT) — and instead go with Hilton Worldwide Holdings Inc (HLT). It’s another big player in the global hotel industry.
According to Chad Beynon, senior lodging analyst at Macquarie Capital, HLT is opening more hotel rooms in the next few years than any other company in the industry — 260,000 were in development as of October 2015. That’s a lot of additional revenue per available room (RevPAR). In 2016, Hilton expects RevPAR to increase by 4% to 6% on net unit growth between 45,000 rooms and 50,000 rooms.
Financially, Hilton is set to deliver another strong year.
In the first nine months of 2015, its adjusted EBITDA was $2.1 billion — 15% higher than a year earlier. Management expects that it will finish 2015 with at least $2.84 billion in adjusted EBITDA, 13% higher than in 2014. Sure, one could make the argument that its RevPAR growth is decelerating slightly — 2014 RevPAR increased 7.1% — and therefore the bloom is already off the rose, but of course you must balance that with a deeply discounted stock price.
Hilton stock has lost 33% in the past 52 weeks, 9% year-to-date, and currently trades 43% below its 52-week high of $31.60. In fact, HLT stock is trading below its $20 IPO pricing from Dec. 2013. Some of the best investment opportunities are stocks whose share prices fall below their IPO pricing as the excitement from the IPO roadshow has long been forgotten.
In late January. Hilton launched a midscale brand, Tru by Hilton, that’s expected to appeal to millennials. It’s an effort to woo travelers other than its typical customer in the luxury and upscale markets. Some see it as move to fight Airbnb, which managed to capture 5.4% of the U.S. room supply in 2015.
Hey, you’ve got to fight fire with fire. Hilton will be just fine. At less than $20, HLT stock is worth owning.
Hotel Stocks to Buy Now: Wyndham Worldwide Corp (WYN)
Any time Jim Cramer puts a buy rating on a stock, investors skeptical of his schtick run for the hills. He’s been wrong a lot, say the doubters but then that’s going to happen when you put your two cents in on as many stocks as he does. It’s the nature of the beast.
On Feb. 2, he gave the thumbs up to Wyndham Worldwide Corp (WYN), suggesting that it has been beaten down too much. Less than a year ago, WYN stock was trading close to $100, but it has since fallen below $70. WYN caught the same flu all the other hotel stocks suffered.
But if you look at its results for the year — a 5.5% increase in annual revenue to $5.5 billion and a 6% increase in adjusted net income to $608 million — it did very well in 2015. Finishing with $769 million in free cash flow, you’re looking at a stock that’s yielding nearly 10% on a free cash flow basis (FCF/Market Cap). Marriott, by comparison, is yielding about half that.
A bonus attraction of WYN stock: It hasn’t split off its vacation ownership business like Marriott did and so, if things continue to remain stuck in the mud, CEO Stephen Holmes has another lever to pull in addition to stock repurchases (it bought back 2.2 million shares in Q4 at $75 per share) and increased dividends.
Other than Hilton, it’s the best when it comes to hotel stocks.
Hotel Stocks To Buy: Diamond Resorts International Inc (DRII)
You can pick up Marriott Vacations Worldwide Corp (VAC) currently for eight times EBITDA or you can go farther afield, paying seven times EBITDA for Diamond Resorts International Inc (DRII), a lesser-known name that deserves a lot more attention.
Diamond’s Q3 2015 report was not only the company’s ninth consecutive quarter of record results, it was the biggest and most profitable quarter in its history. Adjusted EBITDA grew 22% year-over-year to $18.4 million, while revenues were up 13.3% from Q3 2014. Most importantly, it generated $112 million in free cash flow in the quarter and $225 million through the first nine months of its fiscal year, 42% higher year-over-year.
Things are looking good at the moment.
In October, DRII completed a $167 million acquisition of Gold Key Resorts, a deal that added five vacation ownership resorts in Virginia and one in North Carolina, bringing the number of managed resorts to 99. In late January, DRII completed a second deal to acquire the vacation ownership business of Intrawest Resort Holdings Inc (SNOW) for $85 million.
But investors might want to proceed with caution on this one.
Diamond got its start when Stephen Cloobeck, its founder and chairman, reentered the vacation ownership business with the purchase of Sunterra Corporation in 2007 for $700 million. Only five years earlier, Sunterra emerged from bankruptcy protection.
The industry, and Diamond in particular, have many critics, and more rise to the surface every day as the demand for timeshares increases — something that hasn’t been seen since the early 2000s. The New York Times did a good job detailing the pitfalls of vacation ownership in a January article by Gretchen Morgenson. It isn’t pretty.
So, why buy?
Because it is growing at a good pace, has experienced management in place, and hasn’t been this cheap since early 2014. If you can handle a lot of risk, Diamond Resorts is hotel stock worth serious consideration.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.