These 3 Hotel Stock Picks Have Room for More Gains

Submitted by George Putnam, III as part of our contributors program.

These 3 Hotel Stock Picks Have Room for More Gains

The hotel and motel sector offers an appealing contrarian investing opportunity with strong fundamentals and undervalued stocks. While the group has performed decently, current industry conditions are very favorable and suggest more gains are ahead.

Like most sectors, the key drivers of performance in the hotel/motel are supply and demand. Demand comes from travelers, particularly business travelers, and this has been growing nicely over the last couple of years. Supply comes from the construction of new hotel rooms, and that is lagging well below historical averages because it is still difficult to get financing.

Growing demand and static supply means that hoteliers should be able to continue to raise room prices, which is great for the bottom line. Moreover, because most of these companies are structured as real estate investment trusts (REIT’s), increasing profits will mean growing dividends.

Diamondrock Hospitality (DRH) has acquired premium hotels in gateway markets, while disposing of non-core hotels located in secondary markets. Rebranding the new properties as well as making capital improvements and management changes are expected to create value. Diamondrock is well financed and positioned to capitalize on growth opportunities.

Felcor Lodging (FCH) announced in 2010 that it would dispose of 39 non-strategic hotels; to date the company has sold or is in the process of closing on the sale of 27 properties. Management has used the proceeds to pay down debt and extend maturities–currently there are no debt maturities until June of 2019. The stock has performed well since I recommended it in November 2012, but I think it has a lot further to go. As a result, I’m raising my maximum recommended buying price to 9. Also, I wouldn’t be surprised to see Felcor reinstitute a dividend fairly soon.

Hersha Hospitality (HT) owns and operates 48 hotels located in what management describes as urban gateway markets such as New York, Boston, Miami and Washington, DC. With the recent agreement to sell 16 properties to the Blackstone Group, Hersha has exited from Long Island, suburban Philadelphia, Connecticut and Rhode Island at the same time it is expanding in the San Diego and Miami markets. As a result, Hersha is now a more focused urban operator with exposure to some of the best performing markets in the U.S.

Disclosure Note: Accounts managed by an affiliate of the author own certain stocks discussed in this article.