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Starwood Hotels: How to Play It

Starwood has soared 75% in 12 months, but other hotel stocks are held in higher esteem by analysts.
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BOSTON (

TheStreet

) --

Starwood Hotels

(HOT)

has soared 75% in the past 12 months, outperforming the

S&P 500

by 68 percentage points. The stock's beta value (a measure of stock market correlation) of two explains just a portion of the meteoric run.

The rest is due to operational improvement. Still, Starwood has delivered annualized losses of 6.1% since 2007. Is Starwood still an attractive hotel stock or are competitors' shares better picks?

Starwood's second-quarter net income decreased 15% to $114 million, but earnings per share tumbled 46% to 42 cents. Revenue grew 10% to $1.3 billion. The gross margin widened from 22% to 23% and the operating margin extended from 8.9% to 11%.

Starwood held $154 million of cash and $3.4 billion of debt at the end of the quarter, equal to a weak quick ratio of 0.4 and an excessive debt-to-equity ratio of 1.7. Quarterly return on equity, a key measure of profitability for investors, turned negative, and return on assets contracted from 3.6% to 0.8%.

Those returns lagged the mean for the industry and S&P 500. Starwood's stock has gained 14% since the quarterly report. It trades at a forward earnings multiple of 35 and a cash flow multiple of 22 -- 44% and 67% discounts to hotel, resort and cruise line peer averages. Yet its book value multiple of 5 and sales multiple of 2 reflect discounts of 14% and 25%. The stock offers a distribution yield of 0.4%. Analysts are bullish, with 14, or 64%, rating Starwood "buy" and eight rating it "hold." None rank the stock a "sell."

A median price target of $56.57 suggests a 13% return. Bullish are Stifel Financial, expecting the stock to rise 40% to $70, and Citigroup, predicting a gain of 30% to $65. In the bear camp are Deutsche Bank, expecting Starwood to fall 16% to $42, and Societe Generale, forecasting a 20% drop to $40. Institutional owners paint a muddled picture. Of the 20 largest, nine, including largest investor

Waddell & Reed

(WDR) - Get Waddell & Reed Financial, Inc. Class A Report

, added to their positions in the latest quarter as nine, including second-largest owner

TheStreet Recommends

Fidelity

, trimmed their holdings. Two investors held steady.

TheStreet's

quantitative stock model is cautious on Starwood, rating it "hold." The model prefers

Home Inns & Hotel Management

(HMIN)

, a Chinese economy chain rated "buy."

Sonesta International Hotels

(SNSTA)

and

Choice Hotels

(CHH) - Get Choice Hotels International, Inc. Report

are rated "hold", but receive higher overall marks than Starwood does for risk-adjusted performance. Analysts' favorite hotel stock is

Full House Resorts

(FLL) - Get Full House Resorts, Inc. Report

which receives "buy"-ratings from all four analysts covering the company. A median price target of $4.62 suggests a return of 47%.

Another sell-side favorite is

Wyndham Resorts

(WYN)

. Of researchers following Wyndham, eight, or 89%, advise purchasing its shares and one recommends holding. None advocate selling. A median target of $31.83 implies that the stock could rise 23%. To reiterate: Analysts are more positive on both Wyndham and Full House than they are on Starwood and expect greater upside in the aforementioned stocks. Investors looking to mitigate idiosyncratic risk should consider the

PowerShares Dynamic Leisure & Entertainment ETF

(PEJ) - Get Invesco Dynamic Leisure & Entertainment ETF Report

.

-- Written by Jake Lynch in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.