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What are we looking for?

Hospitality stocks with profitable operations and compelling valuations.

As winter’s chill takes a grip on Canada, many Canadians turn their thoughts to vacation pursuits involving hotels, resorts and cruises. This industry is very much dependent on the economic cycle, being a discretionary expense that is tied closely to overall consumer confidence. With the economic engine in the United States still strong and consumer confidence near 15-year highs, this industry appears attractive.

The screen

We will be using Trading Central Strategy Builder to search for U.S. hotel, resort and cruise line stocks with growing earnings, profitable operations and reasonable valuations.

We will start by screening for hotel, resort and cruise line stocks with a market capitalization of US$1-billion or more. This will limit our results to the largest and most stable companies in the industry. To find firms with strong earnings growth in the recent past, we will filter for quarterly earnings-per-share growth (past quarter over prior year) of 10 per cent or more.

To ensure we are purchasing companies with profitable continuing operations, we will also include a criterion for an operating margin of 8 per cent or greater. Operating margin is a measure of how much profit the company makes on each dollar of core revenue. Higher operating margins are preferred.

Last, to find stocks with attractive valuations, we will filter for trailing price-to-earnings ratios of 25 or less.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-trade funds, indexes, forex, options and commodities.

What we found

Topping our list is Norwegian Cruise Line Holdings Ltd. with a market cap of more than US$10-billion and an operating margin of 19.6 per cent. After hitting a record high in January, 2018, Norwegian Cruise Line stock slid lower for most of the year, despite exceeding analyst earnings expectations in the first through third quarters. With a trailing P/E ratio of 12.7, the stock looks well-valued compared with many of its peers.

Red Rock Resorts Inc. is a resort and casino management company operating 21 casinos in Nevada and California. The chain draws its name from the Red Rock Canyon National Conservation Area near its resort in the Las Vegas area. The stock struggled in 2018, hitting a 52-week low in December. The company is attractive for its strong operating margins (31.7 per cent) and P/E ratio of just 12.4 – the lowest on our list.

Marriott International Inc. is the largest company on our list with a market cap of US$37.9-billion. Marriott completed its merger with Starwood Hotels in 2018 to become the largest hotel chain in the world with more than 6,500 properties. Marriott has put in a strong earnings performance over the past year with November’s third-quarter earnings up 32.5 per cent over the same quarter last year.

Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described above delivered a 19.3-per-cent annualized return compared with 8.4 per cent for the S&P 500 and 9.5 per cent for the Dow Jones Industrial Average over the same period.

Five hospitality stocks to keep investors warm

Rank Company Ticker Recent Price ($) Market Cap. (US$Mil) P/E Ratio (TTM) Operating Margin (%) EPS Growth (Past Q vs Prior Yr, %) Div. Yield (%)
1 Norwegian Cruise Line Holdings Ltd. NCLH-N 50.85 10,717 12.7 19.6 21.3 0.0
2 Red Rock Resorts Inc. RRR-Q 25.00 1,722 12.4 31.7 22.2 1.6
3 Choice Hotels International Inc. CHH-N 78.66 4,343 25.0 30.9 68.5 1.1
4 Royal Caribbean Cruises Ltd. RCL-N 120.98 23,418 14.3 20.5 10.6 2.5
5 Marriott International Inc. MAR-Q 113.64 37,906 23.9 11.8 32.5 1.5

Trading Central

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of customer success at Trading Central.