It's a volatile stock market out there right now as investors eye the start of the Federal Reserve's first rate-hike cycle in years and geopolitical uncertainty stemming from the war in Ukraine.
With so much attention focused on these two issues, many investors might be missing opportunities available in a recovering travel industry, particularly among hotel stocks.
Since mid-January, new COVID-19 cases in the U.S. are down nearly 98% from their mid-January high, according to data from the Centers for Disease Control and Prevention.
And while TSA data shows that current travel volumes are running about 10% or so below 2019 levels, recently upgraded forecasts from airlines suggest a vigorous rebound later this year.
Airlines certainly give us insight into current and future travel demand, but they might not be the best investment option at the moment given their exposure to oil prices and high levels of debt. Hotel stocks, on the other hand, have much better economics and pricing power. Further, hotels didn't have to dilute shares and borrow money as excessively as airlines during the pandemic. And many were able to use the downturn to improve operating margins.
With this in mind, here are five hotel stocks to buy amid a summer travel boom. To create the list, we examined only top-rated stocks in the Stock News POWR Ratings universe. The stock-rating tool measures more than a hundred different factors – from balance-sheet strength to analyst sentiment to momentum – to find which names are poised to outperform the market. All of the hotel stocks listed here have Buy or Strong Buy ratings.
Data is as of March 27. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
InterContinental Hotels Group
- Market value: $12.8 billion
- Dividend yield: N/A
- POWR Ratings overall rating: B (Buy)
InterContinental Hotels Group (IHG, $69.82) owns, manages, franchises and leases hotels in various countries worldwide. The U.K.-based company has approximately 6,000 hotels and 886,000 rooms in roughly 100 countries.
IHG operates under several brands, including EVEN Hotels, Regent Hotels & Resorts, InterContinental Hotels & Resorts, Hotel Indigo, Crowne Plaza, Holiday Inn and Holiday Inn Express. It also provides an IHG Rewards loyalty program.
Large hotel operators like IHG have been able to use the pandemic to pursue growth opportunities while smaller operators were more focused on survival. The company opened 291 hotels in 2021 and signed another 437 into its pipeline of properties.
InterContinental Hotels Group's full-year 2021 results showed a strong average daily rate (ADR) – a key metric in the hospitality industry that measures revenue earned on occupied room – in all of its regions, particularly in the U.S.
Overall, IHG saw 32% year-over-year (YoY) evenue growth in 2021 compared to 2020, though it still remains 33% below 2019 levels. International, business and group travel remain laggards, and the firm has more exposure to these segments than many other operators given its international presence.
Buying IHG is an implicit bet on improvement in these categories as many leisure areas across its North American properties are already above pre-pandemic levels.
InterContinental Hotels Group has an overall B (Buy) rating in the POWR Ratings system. B-rated stocks have posted an average annual return of 20.1% which compares favorably to the S&P 500's annual return of 8.0%.
Included in the firm's score is a Quality Grade of B, considering IHG is one of the top hotel stocks in the space with ownership of well-known brands and premium properties. IHG also has a Sentiment Grade of B, with four out of the five Wall Street analysts covering the stock giving it a Strong Buy rating. Check out the complete POWR Ratings for IHG, including a deeper dive into its component scores.
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Travel + Leisure
- Market value: $5.0 billion
- Dividend yield: 2.8%
- POWR Ratings overall rating: B (Buy)
Travel + Leisure (TNL, $58.48) provides hospitality services and products in the U.S. and abroad. The company was formerly known as Wyndham Destinations and Wyndham Worldwide and is headquartered in Orlando, Florida.
TNL operates in two segments: Vacation ownership and leisure travel and membership. The company's portfolio is made up of hotels and resorts, and includes brands such as Club Wyndham, Worldmark by Wyndham and Margaritaville Vacation Club by Wyndham.
The company generates the bulk of its revenue from timeshares. This type of business experienced a steep decline during the pandemic, but Travel + Leisure's most recent earnings report shows that a turnaround has already begun.
Overall in 2021, TNL had $3.1 billion in sales, up 45% YoY, but down 22% on a two-year basis. The company also reported $3.56 in earnings per share (EPS) – a vast improvement over 2020's per-share loss of $2.96, but not quite at the $5.50 per share Travel + Leisure earned in 2019. In 2022, analysts are forecasting $3.6 billion in sales, on average, and $4.45 in EPS.
The company's improving fundamentals can also be seen in its growing dividend. TNL recently hiked its quarterly dividend by 14.3% to 40 cents per share, or $1.60 per share on an annual basis. This works out to a current dividend yield of 2.8%, higher than the S&P 500's 1.3%.
Another sign of strength is that Travel + Leisure completed a bond offering of $275 million at interest rates between 3% and 4%.
TNL is another of the B-rated hotel stocks in the POWR Ratings universe, which equates to a Buy. Travel + Leisure has strong component grades across the board including a B for Value – based on the firm's forward price-to-earnings (P/E) ratio of 10.5x, well below the S&P 500's 18.9x. Take a look at the full breakdown of TNL's POWR Ratings component scores.
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Target Hospitality
- Market value: $584.2 million
- Dividend yield: N/A
- POWR Ratings overall rating: B (Buy)
Target Hospitality (TH, $5.73) is one way to play the red-hot energy sector via hotel stocks. The specialty rental and hospitality services company caters to a variety of clients, including those in the oil and gas equipment & services industry.
TH offers housing and hospitality solutions across key locations for energy firms, including the Permian, Bakkan and Anadarko oil fields. Currently, the company owns around 16,000 rooms across 31 different locations.
While TH services for a variety of end-users, the bulk of its revenue comes from companies in the energy sector. As such, it is not surprising that revenues were depressed alongside energy prices in 2020. And while oil prices started to see a recovery in 2021, drilling activity in North America didn't materially pick up until 2022 when oil started approaching the $100-per-barrel level.
U.S. rig counts came in at 670 for the week ended March 25, according to energy technology firm Baker Hughes, up 60.7% from the year-prior. The number could keep rising too, given expectations that North American oil production should exceed pre-pandemic levels by the fourth quarter.
And Russia's invasion of Ukraine may mark an inflection point for energy prices as bipartisan support and appreciation for domestic energy production rises. Both developments bode well for TH.
Another positive is that the company has reduced costs and improved operations. This is evidenced by its free cash flow per share being higher than pre-pandemic levels, despite revenue being lower by about 3%.
In 2021, Target Hospitality lost 5 cents per share, while bringing in $291 million in revenue. But in 2022, analysts are forecasting a profit of 9 cents per share and $332 million in revenue.
As such, the stock has a Growth Grade of A – part of its overall B (Buy) rating in the POWR Rating system. Also helping its growth score is its exposure to two sectors with very strong momentum: Energy and hospitality. Check out the full POWR Ratings breakdown for TH.
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Choice Hotels
- Market value: $8.0 billion
- Dividend yield: 0.7%
- POWR Ratings overall rating: B (Buy)
Choice Hotels (CHH, $143.09) is a unique company relative to other hotel stocks. CHH franchises lodging properties under several brands, including Comfort Inn, Clarion, EconoLodge and Rodeway Inn. It currently franchises more than 7,100 hotels in no fewer than 40 countries and territories.
Franchising means higher margins than operating a hotel. This is evidenced in CHH's gross margin of 56.1%, well above the industry average of 28.9%. Choice Hotels also markets cloud-based property management software to non-franchised hoteliers, which helps boost margins too.
While higher margins are supportive of multiple expansion, the recovery in travel will help accelerate earnings growth. And Choice Hotels is poised to be a major beneficiary of this increase in travel, as it has a 24% market share of middle-market hotels and a 20% market share of economy properties. Plus, 80% of its portfolio is in the U.S., which is the market seeing the strongest recovery.
Another reason to like Choice Hotels is that its revenues are nearly back to pre-pandemic levels, with room for more recovery across multiple categories. As such, the company has a Growth Grade of B in the POWR Ratings system, part of its overall B (Buy) rating.
What's more, free cash flow – or the money left over after a firm has paid its expenses, interest on debt, taxes and long-term investments needed to grow the business – and earnings that are above 2019 levels.
CHH also has a grade of A for Quality due in part to its return on invested capital. At 26.1%, this is well above the industry average. Take a closer look at the rest of CHH's POWR Ratings.
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Bluegreen Vacations Holding
- Market value: $655.6 million
- Dividend yield: N/A
- POWR Ratings overall rating: A (Strong Buy)
Bluegreen Vacations Holding (BVH, $30.62) markets and sells vacation ownership interests and manages resorts in popular leisure and urban destinations. The company provides a variety of services in addition to resort management, including financing to qualified vacation ownership interest (VOI) purchasers and management solutions to vacation clubs and homeowners' associations.
A major source of revenue for BVH is its Bluegreen Vacation Club. This is a flexible, points-based, deeded vacation ownership plan with 68 Club and Club Associate Resorts and access to nearly 11,300 other hotels and resorts through partnerships and exchange networks.
BVH is an example of a company that used the pandemic to reduce costs and boost margins. Despite 2021 revenues being lower by roughly 4% compared to 2019, the company's free cash flow was up by 50%. This is because Bluegreen Vacations Holding raised prices and sold more premium services and products.
And momentum is picking up. In the fourth-quarter of 2021, revenue was 22% higher than the same period in 2019. This is despite slightly fewer vacation packages sold last quarter compared to Q4 2019.
Plus, the $63 billion in free cash flow BVH generated for the full fiscal year is nearly 10% of its market cap. Thus, it's not surprising that Bluegreen Vacations Holding added $50 million to its share buyback program. This brings its total purchasing power to $90 million worth of shares, which equates to about 14% of its total market cap.
For 2022, the average analyst estimate is for earnings of $3.36 per share – a 20% increase over 2021. Revenue is expected to increase by 8.3% to reach $820 million. Notably, analysts have hiked their 2022 and 2023 EPS estimates by around 20% since the start of the year. Despite such strong growth expectations, BVH is quite cheap with a forward P/E of 8.1x.
Given this combination of growth and value, it's not surprising that BVH is one of the best hotel stocks in the POWR Ratings system, with an overall A (Strong Buy) rating. A-rated stocks have posted an average annual performance of 31.1%, which compares favorably to the S&P 500's average annual 8% gain.
In terms of its component grades, BVH has an A for Sentiment as the stock has a consensus price target of $57.50, implying potential upside of nearly 88%. See the complete POWR Ratings breakdown for BVH.
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