This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Rally in Hotel Stocks May Come Knocking

Hotel companies are doing everything right -- raising rates, filling rooms and boosting earnings guidance -- and yet shares continue to slide. A combination of economic anxiety and the outsized 2003 sector rally are to blame for recent underperformance, but the underlying fundamental trends are strong, and shares could be worth buying.

At the core of the bullish case is the fact that the hotel industry's recovery is switching gears, leading to higher profit margins and greater earnings growth in the second part of the year. During the first part of a recovery, hotels see occupancy rise as demand increases because of an improving economy. According to Smith Travel Research, an industry tracker, occupancy at all hotel rooms in the U.S. was 60%, with upscale hotels pushing closer to 70% -- the highest levels in two years.

"Fundamentally, the industry is sound. We're looking at seven weeks of double-digit growth in [revenue per available room]," said Jan Frietag, director at Smith Travel Research, noting the high occupancy rates. "What that implies is that hotels are full, and the next step, towards the end of 2004, is that we'll see an increase in room rate growth."

But as occupancy levels rise, filling rooms becomes more difficult and comparisons get tougher. That is happening now. Occupancy at all U.S. hotels during the week ended Aug. 7 rose just 1% year over year. With terror warnings, an uncertain economic outlook and InterActiveCorp (IACI), owner of Expedia, and Priceline.com (PCLN) guiding earnings expectations lower, investors are growing worried that hotel stocks are overvalued and industry fundamentals are peaking.

This is why hotel stocks have fared so poorly over the last month. Since July 16, shares of Starwood Hotels (HOT) -- which has raised guidance for the last three quarters while easily beating analysts' earning estimates -- are off 9.5%. As shares slid recently, Wall Street was raising its earnings expectations, with 18 analysts raising 2004 forecasts by an average of 16 cents. Expectations for 2005 are up an average of 21 cents.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,960.57 -123.23 -0.72%
S&P 500 1,978.34 -9.64 -0.48%
NASDAQ 4,449.5640 -22.5440 -0.50%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs