For February, investors are focused on stock market volatility, the U.S. Federal Reserve tightening rates, and how much the economy is slowing. However, an equally important development is taking place in the background that will have major implications for certain companies, especially travel stocks: the Covid-19 variant omicron wave has peaked and is now rapidly receding.
The seven-day moving average of new cases peaked just above 800,000 and as of Feb.2, cases have declined to 378,015. There are some other positives about omicron, such as it is milder than previous strains. It also has a very low hospitalization and death rate for vaccinated and/or boosted people. Further, there is some hope that all the detected and undetected omicron infections could bring us closer to “herd immunity.”
The biggest winner of these developments is the travel industry. Travel stocks have sold off in recent weeks with the Defiance Hotel, Airline, and Cruise ETF (NYSEARCA:CRUZ) down about 12.6% since the second week of November in part due to omicron and also with the broad market weakness. Therefore, investors should consider stocks that will benefit from travel volumes picking up.
My three top picks are:
Travel Stocks to Buy: Wyndham Hotels (WH)
Wyndham Hotels is one of the world’s largest hotel companies. Currently, it has more than 9,000 hotels in 80-plus countries. Wyndham Hotels operates in two segments: Hotel Management and Hotel Franchising. The Hotel Management segment offers management services for full and limited-service hotels. The Hotel Franchising segment licenses its lodging brands and provides related services to third-party hotel owners.
Clearly, Wyndham Hotels will be one of the biggest beneficiaries of a rebound in travel. This is evident from the company’s revenue in the first and second quarters of 2021, exceeding its 2019 revenue figures before growth slowed in the third quarter (Q3) due to the delta variant.
Coming out of the pandemic, Wyndham Hotels is in a much stronger position as many smaller hotels were shuttered, while others are running below full capacity due to difficulty finding labor. As a multinational, multibillion-dollar company, Wyndham Hotels is able to absorb these inflationary pressures and increase market share to take advantage of the inevitable improvement in operating conditions that should emerge during the spring and summer of this year.
Beyond improving macro conditions, we can also see that Wyndham Hotels is one of the best operators in the segment by looking at its recent earnings report. In Q3, its net revenue increased 37% to $463 million. Its adjusted earnings per share (EPS) increased around 275% compared to Q3 2020.
The company also pays a 1.5% dividend yield and has 12.8% profit margins, which are both above the industry average and average stock in the S&P 500. For Q4, analysts are forecasting $384 million in revenue and for EPS to reach $0.54 per share.
Wyndham Hotels has an overall rating of B, which translates to Buy in the POWR Ratings. B-rated stocks have posted an average annual performance of 20.1% which outpaces the S&P 500’s average annual return of 7.8%. The stock has an A for Growth, which isn’t surprising given its double-digit revenue growth and earnings growth. Next year, analysts are projecting another 10% in revenue growth. Click here to see more information about Wyndham Hotel’s POWR Ratings, including component grades for Value and Momentum.
Choice Hotels International (CHH)
Choice Hotels operates in two segments: Hotel Franchising; and Corporate & Other. The company franchises lodging properties and markets cloud-based property management software to non-franchised hoteliers.
Its brands include Comfort Inn, Comfort Suites, Quality Inn, Clarion, Clarion Pointe, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, WoodSpring Suites, Cambria Hotels, and Ascend Hotel Collection. As of last year, the company had an impressive network boasting over 7,000 hotels with 570,000 rooms located in more than 40 countries.
Another feature is its asset-light models as it is 100% a franchisor. Additionally, its software segment is a long-term, growth engine that other hotel operators have become reliant upon to run and manage their businesses. For investors, it offers higher margins and more growth. As this becomes an increasing share of revenues, multiples should expand.
Currently, hotel occupancy rates are about 15% below 2019 levels. As this moves higher, Choice Hotels will be a beneficiary. However, there is a lot of regional variability with California seeing 40% lower levels of occupancy, while cities in Florida are down between 2% and 5%. Choice Hotels eludes this risk due to the global and diversified nature of its operations.
Choice Hotel’s POWR Ratings also reflect this promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Choice Hotels has a grade of A for Quality, which is consistent with it having the highest margins out of any publicly listed hotel. The company’s B grade for Growth is due to its growing software business, a secular source of growth, while cyclical trends are supportive, as well. Click here to see the complete POWR Ratings for Choice Hotels.
Travel Stocks to Buy: Travelzoo (TZOO)
Travelzoo provides travel, entertainment, and local deals from companies worldwide. The company’s publications and products include the Travelzoo Website, Travelzoo iPhone and Android apps, Travelzoo Top 20 email newsletter, and a Newsflash email alert service.
Travelzoo’s business was obviously crushed by the pandemic, so it should be considered a high upside way to take advantage of a recovery in travel. Currently, the company may be at an inflection point as evidenced by its recent earnings report, which showed a 14% year-over-year increase in consolidated revenue.
More encouraging is its improvement in operations. Revenue remains about 35% lower from pre-pandemic levels but EPS is already higher. This bodes well for continued earnings expansion in the coming months. Next quarter, analysts are estimating revenue of $18.5 million for Q4, which indicates a 48% increase. The EPS estimate of $0.17 is more than two times last year’s $0.06 per share.
TZOO has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. A-rated stocks have posted an average annual performance of 31.1%, which compares favorably with the S&P 500’s 8% average annual return.
In terms of component grades, the stock has strong grades across the board including a Value grade of B. This is consistent with its forward price-to-earnings (P/E) ratio of 6.68. Click here if you want to see the rest of TZOO’s component grades including Growth and Momentum.
On the date of publication, Jaimini Desai did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Jaimini Desai has been a financial writer and reporter for nearly a decade. He has helped countless investors take profitable rides on some of the hottest growth trends. His previous experience includes writing for Investopedia, Seeking Alpha, and MT Newswires. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters.
