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Do Bargain Hotel Rooms Mean Bargain Stocks?

Hotels are in for a bumpy ride, but certain firms look undervalued to us.

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The hotel industry has been riding high for years as tail winds such as limited new supply, growing demand, and low interest rates pushed up occupancies, nightly rates, and asset prices. However, as the economy has begun to falter, these tail winds have become head winds, and the fortunes of hotels are declining. Occupancy and nightly rates have deteriorated, and we expect things to get much worse before they get any better. So should investors steer clear of the entire sector, in the face of declining fundamentals? We believe that investors should exercise caution, but that a few high-quality names are trading at attractive prices.

Demand for hotel rooms is tightly correlated with the broader economic picture. When times are good, business travelers hit the road to meet with clients or to attend conferences. Leisure travelers feel flush with cash and are willing to spend big on family vacations. However, these trends quickly reverse when the economy starts to wobble. Businesses look to cut costs, and the travel budget is often the first thing to go. Families worried about job losses or shrinking investment portfolios choose to scale back their vacations or scrap them altogether. These dynamics have started to play out in the second half of this year, with hotel revenue and profitability taking a hit across the United States.

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Jeremy Glaser does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.