Check In on Hotel Stocks

08/29/2014 7:00 am EST

Focus: STOCKS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

The really great news about owning hotel stocks is that they will not only be benefactors of the solid trends we are seeing in vacation spending, they will also get a boost from increased business travel, suggests Marshall Hargrave of Daily Profit.
 
Hotel occupancy is expected to rise 2.6% year-over-year for 2014 and average daily rates are expected to be up 4.2%. So, not only are hotels seeing increased demand, but they're also getting higher revenues per room.
 
Driving these rate increases is a low-supply environment. During the recession, we saw a steep pullback on new hotels being built and even closure of underperforming locations. This low-supply environment will give the remaining players the opportunity to increase prices going forward.

The hotel industry certainly looks to be heating up. Investors wanting to capitalize on the underrated resurgence in hotel bookings have ample opportunity to do so.  Without further ado, here are the top three hotel stocks to stay in your portfolio:

Marriott International (MAR)

Marriott repurchased $300 million worth of shares during the second quarter and has purchased over $700 million in shares year-to-date.

For all of 2014, Marriott expects to return between $1.35 billion to $1.6 billion to shareholders, which-at the midpoint-is roughly 7.5% of its market cap.
          
Marriott is also looking to tap into the large and growing Chinese market. China is Marriott's second-largest market besides North America. The hotel operator plans to double its number of China properties by 2015.
 
Starwood Hotels & Resorts Worldwide (HOT)
 
Some of Starwood's top brands include St. Regis, W, Westin, Sheraton, and Aloft. You'll not only be capitalizing on the resurgence of the North American travel market, but Starwood is one of the best companies for capitalizing on the China travel boom. Starwood has over half of its properties located outside the US.  
 
Starwood offers a 1.7% dividend yield and plans to return 25% to 40% of its earnings via dividends going forward.
 
Another potential catalyst for Starwood is to spin out its timeshare business. This would allow the company to monetize this asset, while allowing it to focus solely on the hotel business.
 
InterContinental Hotels Group (IHG)
 
This is perhaps the most interesting pick. InterContinental offers the highest dividend yield at 2.4% and the lowest forward P/E ratio of the three. InterContinental is known for the Holiday Inn, Staybridge, and Candlewood brands.
 
InterContinental also enjoys profit margins that are double-sometimes triple-its larger peers.

Whereas most major hoteliers own hotels, InterContinental focuses on hotel management and brand building, owning only a small portion of its hotels. The hotel operator also generates over 50% of its revenues from outside the Americas.
 
The latest news for InterContinental is that activist hedge fund, Marcato Capital, is pushing the company to sell itself to one of the larger players. Being that InterContinental is domiciled in the UK, an American-based company could also engage in a tax inversion by buying up InterContinental.
 
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