Check Out of These Two Hotels

07/22/2009 1:00 pm EST

Focus: STOCKS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says consumer sentiment is slipping again, and discretionary hotels will be among the first to feel the pinch.

The recently completed ChangeWave Alliance Research Network consumer survey shows consumer spending and sentiment is once again declining. The bump up in the past months turned out to be a head fake—and the segment that's leading the decline is travel.

We've got two of the most vulnerable outfits: Las Vegas Sands (NYSE: LVS) and Starwood Hotels & Resorts Worldwide (NYSE: HOT).

The ultimate discretionary travel destination is Las Vegas, so it's time to short it. The company to short is Las Vegas Sands  (NYSE: LVS). In Vegas it owns the Venetian, the Palazzo, and the Sands Expo and Convention Center.

Not just hotels and casinos, but the convention business is on life support in Las Vegas. Better yet, LVS owns three hotels and casinos in Macau, and analysts see these as a buffer against earnings. Macau is no panacea—all you have to do is talk to anyone doing business in China.

And it gets even better, LVS is building a casino in "the" burgeoning hotspot, Bethlehem, Pa. No kidding! I like Bethlehem, only not as a gambling destination.

LVS exploded upward on the ridiculous news that it is capping commissions paid to the tour operators who bring the gamblers to LVS' casinos in Macau. This irrational exuberance led a 10%-plus pop in the stock—and created a great opening for us! Buy the LVS December $6 Puts (LJJXF) under $1.40 (The stock closed below $10 Tuesday, while the puts closed below 75 cents—Editor.)

Third-party data confirm that hotels are hurting, so let’s short the company with the greatest exposure to reduced consumer and business travel.

Starwood is at the high end of the market and has way too much debt, way too little revenue, and a chart that's headed our way.

I expect revenues to be down 28%-35% in the quarter just ended and no turnaround is in the offing until 2011, at best.

The Hilton I stayed at in New York was comparable to many Starwood properties. While it was 90% full, that was mostly due to radically discounted rooms. I paid the same price for a night there that I paid more than 20 years ago.

Starwood also has exposure to a European economy showing even [fewer] signs of life than the US—not even any phony green shoots quickly turning brown.

The stock is trading at around $21-$22; the March low was just below $10. I expect the stock to head there again during the next three to nine months.

Buy the HOT January (2010) $15 Puts (HOTMC) under $1.60. (They traded near $1.10 Tuesday.)

Be patient and use tight limit orders. These stocks are very volatile and it would be smart to buy in pieces whenever the market is calm.

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