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Extended Stay America: Bulls Should Stay Put

About: Extended Stay America, Inc. (STAY)
by: Michael A. Gayed, CFA

Extended Stay America Inc. has underperformed both the broad market and the Dow Jones US Hotel Index.

Extended Stay America just replaced its CEO and beefed up its management.

Its stock has made a positive move over the past two weeks compared to its 50-day moving average.

I'm so fast that last night I turned off the light switch in my hotel room and was in bed before the room was dark.

- Muhammad Ali

For many Americans, when you are not traveling on the company's dime and want to save some money, you look at extended-stay hotels. These offer more space, a small kitchen so you don't have to eat every meal out in a restaurant, laundry facilities, pet-friendly rooms, plus the usual perks of hotels of free breakfast, WiFi, and shuttle buses. Extended Stay America Inc. (STAY) is a major player in this market. With over 600 hotels and close to 70,000 rooms, STAY has you covered in most major urban areas. When looking at the stock returns over the past 1, 3, 5, and 10 years ending November 30, you wouldn't think of STAY as a good investment. Returns in every one of those periods have been negative, but with a new management suite and CEO, there is the potential for a turnaround and gains in the near future.

Since March, STAY is down over 19% on a poor fourth quarter 2018 earnings report and continued weakness throughout the year. Jonathan Halkyard has been CEO for less than 2 years and is being replaced by Bruce Haase. Under Halkyard, the stock has gone nowhere but down, and he never created a vision or plan for the future of the company other than selling assets and buying back stock. By replacing Halkyard, STAY is making a decisive move to wanting to improve their business model. Haase has a 20-year history of working in the hotel/lodging industry with a special focus on the extended-stay market at Woodspring Hotels LLC. He brings with him two former co-workers from Woodspring, Kelly Poling, and Randy Fox. By replacing and enhancing the management suite, STAY looks like a poor-performing stock that may be worth adding a small position to your portfolio before a turnaround takes shape and the stock gets too expensive.

Compared to other hotel companies, STAY looks inexpensive. Its current PE is 15.07 which is much cheaper than its larger competitors like Hilton (NYSE:HLT) (27.14), Choice Hotels (NYSE:CHH) (22.83), Marriott (NASDAQ:MAR) (24.02), and Wyndham (NYSE:WH) (17.67). It also offers a much higher dividend yield of 6.2% compared to yields of less than 1% for Hilton and Choice. Even though STAY's cash dividend payout ratio has been on the rise to 79%, it is manageable and shows they are committed to their shareholders.

STAY is centered on the North American market currently with little to no foreign presence. This leaves a large area of growth for STAY or a potential acquisition target for a hotel looking to get into the extended-stay arena. This year, they opened two new hotels in Florida and Texas. They are focused on areas of the country with extreme population growth and on the middle-to-lower end of the market, which tends to be underserved.

STAY stock has had a decrease of over 6% in shares sold short since October 31 and looks to be building some positive momentum. Its closing price has been over its 50-day moving average for the past two weeks and volume has been considerably higher on these positive trading days. Even though the Consumer Discretionary sector looks weak according to the Lead-Lag Report, STAY is not subject to all the currency and Chinese trade swings due to its domestic nature. If the economy weakens, corporations and individuals will be looking to cut costs including travel costs and can easily find affordable accommodations at Extended Stay America Inc.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.