3 Hotel Stocks to Build Into Your Portfolio

Includes: H, HST, IYR, LHO, MAR, SPY
by: Simon Monger

Hotel stocks have remained relatively stagnant during the economic recovery due to the twin threats of a double-dip recession and weak commercial real estate sector. Two of the industry’s largest players, Starwood Hotels & Resorts Worldwide Inc. and Marriott International Inc. are trading down 2.2% and 9.9% year-to-date, respectively, as investors seek alpha elsewhere.

Despite being ignored by the market, limited new build activity has quietly helped boost occupancy rates, while record low interest rates have helped lower debt costs for many operators. These trends led Goldman Sachs to recommend that its clients buy the sector heading into the second half of the year, saying that it is compelling and will show a multi-year run of outperformance.

Where are the Best Opportunities?

The five most popular stocks in the sector are Host Hotels & Resorts Inc. (NYSE:HST), Starwood Hotels & Resorts Worldwide Inc. (HOT), Hyatt Hotels Corporation (NYSE:H), Marriott International Inc. (NYSE:MAR) and LaSalle Hotel Properties (NYSE:LHO). However, Goldman Sachs recommended Host Hotels & Resorts Inc. as one of the best plays in the sector, and recently upgraded the stock to a Conviction Buy.

Goldman Sachs cited expectations for RevPAR growth, exposure to New York’s market, and the wind down of major renovations as the reasons for its recommendation of Host Hotels & Resorts Inc. Meanwhile, Goldman's analyst issued a $21.00 per share price target for the stock, which represents a significant 20% premium to the current market price, along with a Conviction Buy rating.

Use LEAPS for Cost-Effective Exposure

LEAPS – or long-term equity anticipation securities – are long-term stock options that provide investors with exposure to stocks without the risk of ownership. While similar to stock options in many ways, LEAPS do not exhibit as much volatility or as rapid a time decay as shorter-term stock options. As a result, they represent a way to effectively leverage and create a diversified position.

Investors looking to capitalize on this sector using LEAPS may want to consider the following options:

  • HST $17.50 January ’13 Call @ 2.90

  • HOT $60.00 January ’13 Call @ 10.10

  • MAR $40.00 January ’13 Call @ 4.80

Meanwhile, investors looking to hedge out exposure to the overall market risk can also buy a put option on either a broad index like the SPDR S&P 500 ETF (NYSEARCA:SPY) or a more specific ETF like the iShares Dow Jones Real Estate ETF (NYSEARCA:IYR) in a dollar amount equal to their LEAPS position. Finally, risk can be further mitigated by writing shorter term call options in a diagonal spread position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.